Starting a business requires capital, but what do you do when you don’t have external financing? One solution is to bootstrap your business (yep, as in “Pull yourself up by your bootstraps”).
Keep reading to learn more about the benefits (and drawbacks) of bootstrapping, what it looks like in practice, and how to sustain a new operation without traditional financing.
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What does it mean to bootstrap a business?
Bootstrapping refers to the process of starting and growing a business without formal external financing. Of course, bootstrapping doesn’t mean you launch a business without any money at all—it just means you tap into your own resources as an entrepreneur instead of getting a business loan or reaching out to investors.
Those personal resources could include:
- Your savings
- A personal loan or line of credit
- A gift or loan from friends or family
- Equity from the sale of a major asset, like a house or car
- Crowdfunding from your community or network
Depending on your business model and offerings, you might need funds from a few different sources to get your business up and running. Once operations are underway and you secure a few customers, you’ll continue to bootstrap using income from early sales, funneling that money back into your business.
As you grow, you might need to increase your marketing budget to draw in more customers, hire an employee to keep up with demand, invest in research and development to improve your products or purchase additional equipment or real estate.
If you have a deep well of personal savings to draw from, or if your business model lets you maintain a low overhead, you might be able to reach profitability by bootstrapping alone. However, most businesses need financing from an outside source at some point in their growth trajectory.
Why would someone bootstrap a business?
The term bootstrapping implies a certain amount of entrepreneurial resourcefulness and drive—but that doesn’t mean it’s necessarily the best approach to take. More often than not, bootstrapping is a means to an end when you don’t have other financial options.
You might bootstrap a business for one of several different reasons:
- You’re a relatively young or inexperienced entrepreneur with a lot of ambition and expertise in a specific subject.
- You can’t meet the credit qualifications or operating history requirements to secure a business loan.
- You don’t have connections to investors.
- You want to experiment using your own money to see if your plan is viable before looping in financial institutions or other people.
- You’re an experienced entrepreneur with a lot of cash (perhaps from the sale of a previous company) to invest in a new project.
- You’re launching an early-stage startup, which might not require much beyond a prototype and comprehensive business plan.
Benefits and drawbacks of bootstrapping a business
Bootstrapping has its advantages. Here are a handful worth keeping in mind:
- You can get started right away. You don’t have to spend time applying for a business loan or pitching to investors.
- You have full creative and strategic control over your business. You don’t have to appease investors while trying to grow your operation.
- If you rely solely on personal savings and gift money, you don’t have to worry about making loan repayments or defaulting on a business loan if your operation fails.
- You have the flexibility to invest in what matters to you and change course if you need to.
On the other hand, there are some significant disadvantages to bootstrapping:
- Bootstrapping is a big financial risk to take on yourself. You may need to scale back on your personal spending, postpone personal financial goals, or carry substantial debt—not to mention manage the stress that comes with funding everything on your own.
- With limited financing, you’re also limited in what you can accomplish. You might not have enough funds to execute your plans properly, which could lead to one of a few different results: 1) you have to compromise on your vision, 2) your business is slow to grow, or 3) you have to close up shop before you really get the chance to build.
- Successful bootstrapping requires a lot of organization and strategy. You need to have a strong understanding of your business model, market, and customers.
- Bootstrapping isn’t typically a sustainable long-term solution. At some point, you’ll likely need external financing.
Businesses that can be bootstrapped
There are certain businesses that respond better to bootstrapping than others. Those include:
- One-person operations with low overhead. If you don’t need a ton of inventory or extra hands to operate, you can get away with starting—and growing—your business using a smaller sum of cash. Examples: a woodworking business you run out of your home or a wedding photography business.
- Digital businesses. When you don’t have to pay for inventory or a physical workplace, you can use the cash you do have to invest in marketing and hiring expert help. Examples: a social media management company or a boutique marketing firm.
- Early-stage startups. If you’re starting a company with the hope of disrupting an industry or scaling rapidly (aka launching a startup), bootstrapping lets you form the initial idea and drum up interest to prove that there’s enough growth potential. From there, you fundraise from investors. Examples: a software company or app.
Many household name companies were initially bootstrapped. Think: GoPro, Microsoft, and Apple. The founders behind these companies started them using their own financial resources, then eventually attracted investors.
5 steps to bootstrapping your business
If you want to start a business without external financing, it’s crucial to have the right resources in place. Follow these steps to raise your chances of success:
1. Figure out your finances
Reviewing your financial resources is a critical first step. Crunching the numbers will help you determine:
- Whether it’s even possible to bootstrap your business
- What kind of business model or setup you can maintain without formal financing
- How much revenue or sales you’ll have to bring in to cover operating expenses
- How much time you have to grow before you’ll need additional financial support
Start by assessing your personal financial situation. What’s your current income like? What are your expenses? How much debt do you have, and how much savings? Do you have any equity in an asset? What are your personal financial goals, both short-term and long-term?
Keep in mind that during the first stage of bootstrapping, you’ll likely need steady income from another job since you may not be able to pay yourself a salary for a while.
When you’re figuring out where your bootstrapping money will come from—whether you’re going to use your personal savings, take out a second mortgage, or get a loan from family—it’s a good idea to ask your accountant for advice. In general, you need enough cash to cover:
- Business website
- Business software, like point-of-sale systems or AI marketing tools
- Operating supplies
- Specific equipment
- Inventory or an initial prototype
- Marketing and advertising costs
- Emergency funds
Need help doing the math? Find out how much it actually costs to start a business.
2. Create a strategic business plan
Every business needs a thorough business plan, but when you’re bootstrapping, it’s critical to write a plan that addresses the specific bootstrapping obstacles you might face—and how to overcome them. For every section of your business plan, aim to answer the following questions:
- High-level business idea: Is your business model suitable for bootstrapping? If not, how can you adapt it?
- Target market and customer demographic: Is there a clear and interested market for what you’re offering? Which kind of customers will put their trust in your business as you’re growing?
- Your product and service pricing and positioning: How will you price your offerings to maximize profits and keep costs low? How will you differentiate yourself from the competition without having a lot of cash flow to fall back on?
- Marketing and sales tactics: How will you draw customers to your business using low-cost marketing strategies with a big ROI?
- Finances: How much money do you have, and how will you allocate it to grow? What does your initial budget look like? How much revenue do you need to break even, and how much to profit? What’s your timeline to profitability?
- Growth strategies and goals: What are your plans for growing your operation on a bootstrap budget? What are your short and long-term goals?
Need help starting your business plan? Check out our guide to writing a business plan from start to finish. Or use this business plan template for startups.
3. Embrace cost-effective marketing strategies
Most bootstrapped businesses rely heavily on marketing tactics that are low cost, high impact. The more successfully you can market your business, the faster you can build a customer base; the more revenue coming in consistently, the more cash flow you have to invest in growth initiatives.
Here are a few options for marketing your offerings without blowing your budget:
- Email marketing: Don’t overlook the classic—strategic email campaigns have excellent ROIs. Play around with different types of emails, from newsletters to promo emails and invitations to events. Hubspot and Mailchimp are both great email marketing platforms you can use for free.
- Social media marketing: Meet your customers where they are. Targeted Facebook and Instagram ads are helpful, but it’s just as critical to build a strong social media presence and engage with potential customers on your channels. You can experiment with different types of content, share product tutorials and customer success stories, and host contests or giveaways. Buffer and Hootsuite are two good (and free!) social media marketing platforms to try.
- Customer referrals: Encourage customers to refer your business to their family and friends; incentivize them with discount codes or rewards points.
- Tap into your network: Share product samples or discount codes with friends, family, neighbors, and community members to drum up interest in your business.
4. Keep your overhead low
When you’re relying on unpredictable finances to fuel your business growth, it’s important to keep operating costs as low as possible. The good news is it’s possible to maintain a low overhead without sacrificing quality. The trick is to splurge on a few key areas—like your branding and products—and then get resourceful for everything else.
These solutions can help:
- Forgo a formal business space if you can: If you can operate your new business out of your home, you’ll save on rent, taxes, and utilities. If you do need a physical space to operate out of, get creative to minimize costs; see if you can share a rental space with another business owner or get a discount on rent if you pay for a few months upfront.
- Outsource as much as you can: Get help where you can, whether that means hiring a social media coordinator to run your platforms or enlisting family help to fill packages or apply shipping stickers. You can also automate tedious administrative processes—everything from payroll to inventory management—using business software or AI tools.
- Take advantage of free resources and tools: There are countless different business planning sites and apps with free or super low-cost monthly plans. Check out this list of 11 free business tools or look at our guide to starting a business with AI.
- Swap services with another creative or entrepreneur: Offer your expertise to a fellow entrepreneur or small business owner in exchange for help with something you need, like photography or a stellar landing page.
5. Use customer funding to get to the next stage
When you’re bootstrapping a business, tapping into customer funding is key to increasing your revenue. You’ll use money from presales or early sales to sustain your operation and free up cash flow for growth purposes.
Presales are when you get customers to pay for your product or service before it’s available—or in some cases, even fully complete. You use a chunk of your bootstrapping budget to pay for materials and kick off a big marketing campaign. Then, once you have money from presales coming in, you can use it to bring your offering to life or create the next batch of products.
Presales are a great way to build hype around your business and gauge how much interest there is in your specific products or services—without having to drain your financial resources in the process.
If you don’t go the presale route, you can still follow the same process: reinvesting the money you get from initial customer sales back into production or marketing.
What happens after bootstrapping?
Bootstrapping your business gives you a solid foundation to grow upon. From there, you have a few options:
1. Keep using customer money to fuel your growth
If you’re on a good trajectory with your business—meaning you’re noticing a steady increase in revenue or customers, and you’re at least breaking even with your spending—you could start profiting in the near future. However, if you continue to bootstrap, you need to be very strategic and intentional with your cash flow. One wrong move without the right ROI could set you back and limit your ability to operate.
2. Apply for business financing
If you’re getting more customer demand than you can sustain with your current cash flow, or if you want to grow faster, business financing could help. Plus, you’ll be more likely to qualify for a business loan now that you have a detailed business plan, some operating time under your belt, and a certain amount of revenue.
Keep in mind that business loans from banks usually have higher credit standards, but they also offer the lowest interest rates. Loans from alternative lenders, on the other hand, have higher interest rates in general, but they have more flexible credit qualifications and a faster turnaround time. Want more info? Here are seven different types of business financing—and when to consider them.
3. Pitch investors for support
If you launched a startup, investor funding is essential to scale and take your product to market. Before you can start the first round of fundraising, you’ll need to research and contact relevant investors, sign up for pitch fests, and build a winning pitch deck.
To bootstrap or not to bootstrap?
Bootstrapping a business can be risky, but it’s also an opportunity to bring your idea to life on your own terms. Just make sure you’re in a position to succeed. Bootstrapping could be a good option for you if your business has a low overhead, if you have a customer market you know you can tap into quickly, and if you don’t need hundreds of thousands of dollars to build your products or services.
In the meantime, explore our definitive guide to starting a business from scratch.
