Bootstrapping for startups

What is bootstrapping in business?

If you self-fund your business using your own money rather than using formal business loans or an investor, you’re bootstrapping your business. 

The term bootstrapping comes from the saying “to pull yourself up by the bootstraps.” Originally, it referred to pulling yourself out of poverty, but its meaning has subtly changed since it was first introduced in the 1880s. Now, it refers to doing something on your own without external help. In the case of business, the help relates to funding. 

Why use bootstrapping?

Bootstrapping can be attractive due to the challenges often faced by startups when looking for a business loan. Eligibility criteria for startup loans can be strict, and you might not qualify. Or, if you do qualify, interest rates can be high, and you may need to sign a personal guarantee. 

Some entrepreneurs prefer not to take on debt early on and instead use their own savings or money from friends and family to start their businesses. Any profits made are poured straight back into the business. 

It can be easier to qualify for other forms of business finance once your business is up and running and you can prove it’s profitable. 

Stages of bootstrapping

There are three main phases of bootstrapping:

1. Beginner stage

In this phase, you use the money you’ve saved or borrowed from friends or family to start a business. You’ll often continue working at your main job while establishing your startup. 

2. Customer-funded stage

Here, you use the money you’ve earned from customers or clients to keep the business ticking along during its early growth phase.

3. Credit stage

Once you reach this point, you may apply for business loans to help your business expand by hiring staff, buying new equipment, and so on.

Advantages of bootstrapping

• Reduced debt: By avoiding outside sources of financing early on, you won’t be taking on debt. This approach means there’s no risk of defaulting or damaging your credit score

• More control: Because you’re not giving away a share of your company in return for investment, you can maintain complete control of your business without input from investors

• Builds experience: When running your own business, you need to look for unusual ways to solve problems, which will help you gain more experience, get creative and develop better spending habits

• Saves time: Seeking external funding can be hugely time-consuming and stressful. Bootstrapping means you can focus fully on growing and developing the business instead  

Disadvantages of bootstrapping

• Increased financial risk: Using your own money to start your business could mean you struggle to cover emergency or unexpected costs or even household bills. You might also lose the money you’ve invested 

• Slower growth: A lack of funding could restrict your growth potential or result in delayed plans

• Limited funds: You might not have enough money to get your business off the ground, in which case, bootstrapping won’t be the best option

• More stressful: Bootstrapping can be hard work, and you might need to hold down your main job while trying to also launch your business 

Bootstrapping tips

When bootstrapping a business, you need to have a laser-sharp focus. The following seven points can help you succeed.

• Understand your target market: To increase your chances of success, you need to know your market inside out. Carry out market research and learn to spot trends 

• Start with a basic version: It’s sensible to start small to conserve resources. Launch a basic version of your product or service to gauge customers’ interest before taking it to the next level  

• Create a business plan: This document should outline your vision and goals and define your company’s objectives 

• Make the most of networking opportunities: Networking can help you meet others in the industry and advertise your business 

• Find a mentor: A successful veteran in your area of business may be able to offer valuable insights to help you grow your business 

• Focus on your operations: Make sure you fully understand every part of your business. Nothing should be overlooked

• Stay frugal: Monitor your outgoings closely and do everything you can to keep costs low. Negotiate with suppliers and work from home rather than renting an office. Your salary is likely to be low at first, as any profits should go straight back into the business 

What are the alternatives to bootstrapping?

If you’re unsure whether bootstrapping is the best choice for you, there are several alternatives to consider:

Small business loans

Small business loans enable you to borrow from a lump sum, the amount available will vary depending on what the lender offers. You repay your loan in fixed monthly instalments, with interest, over a set term – usually between one and five years. 

Business credit cards

Business credit cards are a flexible way to borrow cash up to your credit limit, whenever you need it. They can be ideal for managing cash flow and you repay the amount borrowed in flexible monthly instalments. You might also be able to get a business credit card that charges no interest for a set time. But in most cases, interest will apply to repayments. 

Government grants

A government grant is a sum of money awarded to a business to help it grow. Unlike loans, these funds do not need to be repaid. However, eligibility will depend on factors such as the size of your business, its location and the industry you’re in. You can view a list of available government grants on the GOV.UK website to see if you’re eligible to apply. 

Crowdfunding

Crowdfunding is a way of raising funds from a group of people. You’ll typically need to list your business on an online platform like Seedrs or Crowdfunder. In return for their investment, you could give your investors a share in your business or a reward, such as a sample of the product you’re launching.

Peer-to-peer lending

Peer-to-peer lending sites match those who want to borrow money with those who have cash to invest. Interest rates can be more favourable than high street banks for both the borrower and the lender, but fees often apply. 

Angel investors 

Angel investors are high-net-worth individuals who mostly invest in start-ups or early-stage businesses. As well as investing their cash, they can offer their skills and expertise in the industry to help your business succeed. 

For further options, read How to raise money for a business without a loan.