Bootstrapping for Beginners: The Pros and Cons of Self-Financing Your Business

    By Darrell Henley | Small Business

    It’s hard to forget my grandpa’s story of entrepreneurship in the ’60s. When he was completely broke with four hungry kids taking popcorn to school for lunch, he walked into his hometown bank with an idea.

    He wanted to build a spec house, but he had no money to put down. He’d never even built a house before, but he walked out 30 minutes later with 100 percent of the financing for his first spec home. He went on to build hundreds of homes with that bank’s financing.

    It used to be that a hopeful entrepreneur could walk into a bank with nothing more than ambition and a great idea. A couple of handshakes later, he could walk out with money.

    Those days are gone. Financing an unproven project can be very tricky. Add in an unproven entrepreneur, and it’s almost impossible. This is where bootstrapping can save the day.

    Bootstrapping Your Way to Success: The Pros and Cons

    Bootstrapping — self-financing by using whatever cash you have to start your business and continuing to finance that business from its own cash flow — can work well. I co-founded a bootstrapped business that grew to eight-figure annual revenues. But it’s not easy! It requires lots of sacrifice — the biggest sacrifice being your time. If you aren’t afraid of the downsides, then bootstrapping might be an option for you.

    All of your time is spent on the business. My business partner and I received job offers with benefits and six-figure salaries but turned them down to devote our time to the business, which barely paid us five figures. Back then, a date with my wife meant sharing something off the value menu at Taco Bell. Even making time for that was difficult — I had to devote every waking hour to the business.

    You will work many jobs for little pay. At first, we couldn’t afford to hire employees. Although my partner and I worked many jobs at our business for little or no pay, we certainly couldn’t find other people willing to do so. We hired later, but imagine hiring someone to do menial tasks and paying them more than you make! Expect to do this with bootstrapping.

    Plan for pain. Personal relationships will be damaged because you won’t have the necessary time to nurture them. You will be tired, poor, and stressed beyond belief. A lack of financing could cost you important market position and leave you unable to effectively compete with your better-financed competition. In fact, you might be left behind by that competition.

    Weigh these downsides against your own abilities and willingness to sacrifice. Keep in mind that the rewards to bootstrapping can be equally big.

    You’re in control. If you bootstrap, you won’t have a financial partner evaluating every decision you make and potentially taking up time you could spend elsewhere in your business.

    Your business will be lean. You won’t have loan payments to make. Your company will operate lean with reduced overhead; there will be little waste. This means that as you grow, you’ll probably make higher profits percentage-wise than you would have if you’d started with financing.

    It’s easier to respond to the market. You will be nimble and able to respond to the market more quickly because you won’t have to seek approval before making necessary changes.

    Make Bootstrapping Work for You

    Here are the keys to making bootstrapping work:

    • Stay focused. It’s easy to lose focus when you’re doing more than one job, but you can’t succeed if you lose sight of the big picture or your end destination.
    • Know your strengths and weaknesses. Some things will suffer, and some things won’t get done. Focus on your strengths and what you’re good at.
    • Save money. I had a friend with a bootstrapped business, and he hired a company to clean his offices. If you’re going to survive, you cannot spend money on these types of luxuries.
    • Don’t take silly risks. I believe there’s a solid correlation between risk and reward, but I don’t believe in silly risks. Once, on a TV show, I saw a struggling entrepreneur use her petty cash to buy lottery tickets. If you can’t see the folly in that, you only have about a one-in-a-billion chance of succeeding (which is about equal to your chances of winning the lottery).
    • Grow smart. Many bootstrapped businesses fail because they grow too quickly. Make sure you can afford the time and money needed for growth. I’ve watched several companies implode because they grew too fast.
    • Stay calm. You will face crazy amounts of stress. Sometimes, you’ll want to explode, but it won’t help. Keep your composure; stay productive. You must be able to function well under stress to succeed.
    • Be confident. A successful bootstrapping entrepreneur should hold his head high. If you’re working on your back-up plan before beginning, don’t even try it. A bootstrapper should have no doubt in himself, his ability, or his ideas.

    The decision to bootstrap should not be taken lightly. Most people who attempt it fail. The ones who succeed usually reap rich rewards. Bootstrapping my business has been an enriching experience I’d never take back. Although it’s guaranteed to be painful, bootstrapping — depending on your situation, finances, connections, and experience — can be a rewarding way to start a company.

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