When an entrepreneur decides to create a new business, how to achieve financing for the firm is one of the most important elements in their business plan. Over 80% of all new businesses are funded by personal finances or bootstrapping. (Investopedia) Bootstrapping is when a new company is funded by the entrepreneur’s funds or with company revenues. Private funding comes from personal savings or credit cards. Bootstrappers may choose to use company revenue to support the business and grow at the rate possible with the income. This is a comfortable option because it reduces the need to find outside investors or a business loan. Many large corporations started by bootstrapping. For example, some of the world’s most famous computer companies and the world’s most popular soft drink started out with the bootstrapping method.
How do you do it?
To start, the company founder uses their personal savings to create the business. Also, credit cards might be utilized. Once the company generates revenue, the revenue can be used to continue business growth. This allows the company to grow at a rate that makes outside funding unnecessary. $10,000 is reported to be the median for start-up capital. (Investopedia)
What are the advantages?
There are several advantages to bootstrapping. It allows the founder to have complete control of the company. They do not have to answer to investors or bank lenders. Also, they will not dilute their ownership in the enterprise by having to add company shareholders. This provides the entrepreneur creative freedom. In additional, the business owner will be able to work at a growth rate they feel is most comfortable. The founder can try out ideas without the pressure of needing other’s approval beforehand.
What are the disadvantages?
Bootstrapping may not be the best funding option for all entrepreneurs. A disadvantage is that the founder will need to be able to repay their personal money that was used to start the business. They will need to be comfortable managing the company’s finances as well. Another disadvantage is that if the entrepreneur’s business venture fails, they have the potential to have a massive personal financial loss. Also, when bootstrapping, the company may have slower growth than if the business had an injection of start-up funding from outside investors. Another disadvantage is that outside investors often bring experience and contacts that a company founder might be lacking.
Why should you do it?
Bootstrapping is an excellent way for some entrepreneurs to start a business. If the following describes you, bootstrapping might be a perfect fit for your new business enterprise.
You have personal funds readily available to use to start your new business.
You want to own 100% of your company, and you do not want to give up any of your business’s equity.
You can manage personal and businesses finances well. Or you are willing to hire someone that can handle the financial responsibilities to pay you back for the start-up capital as well as manage the company’s finances.
You have time to let your business grow at a pace that is based on the company’s revenue, which might take longer than if you received a larger amount of funding from an outside source.
You want creative freedom to try out ideas. You enjoy working at your own pace without having to answer to other’s expectations.
Bootstrapping is a common way to make an entrepreneur’s dream a reality. If you have the time, money, and financial, organizational skills needed to make it work, you too could be a big player in the computer market or the founder of the world’s next most popular soft drink.
“Bootstrap.” Investopedia. Investopedia, LLC. n.d. Web 1 Oct 2016.
|Amy Ruchte is an accomplished professional with years of experience in business, marketing, and management. She is currently enrolled in the Masters of Entrepreneurship Degree Program at Western Carolina University. Webmasters and other article publishers are hereby granted article reproduction permission as long as this article in its entirety, author’s information, and any links remain intact. Copyright 2016 by Amy Ruchte.|