Small Business Finance: Bootstrapping Will Set You Free


The biggest problem I hear most entrepreneurs have in starting their business is how to raise the funds they need. The truth is 91% of entrepreneurs start their businesses by using debt, while only 7% use their own equity (Lam, 2010). This statistic is almost perfectly correlated with the failure rate. The high failure rate associated with the use of debt is no coincidence.

Many small business consultants offer services to develop a business plan to find financing. I suggest avoiding borrowing as much as you can. Bankers and other lenders are not your friend, but the enemy. Entrepreneurs pay dearly on borrowed money leading to high failure rates. How do you expect to earn a return high enough to cover the double-digit cost of capital when first starting out?

I find finances work better for a small business entrepreneur who can manage his or her own finances. An entrepreneur can control his or her own destiny by following this simple advice. Bootstrapping will set you free and make you independent of the loan sharks. What is bootstrapping? Quite simply, bootstrapping is “using other people’s money.” Moreover, bootstrapping is a continuing course of action, not a onetime affair. A savvy entrepreneur will learn how to use bootstrapping to lessen the need to borrow (Lam, 2010).

Some ways an entrepreneur can use bootstrapping include working out of your house, leasing rather than buying equipment, buying second-hand equipment, taking advantage of trade credit, hiring inexpensive labor, and employing family members in the business. An entrepreneur can also develop a savings club to raise capital for start-up (Lam, 2010). Using these techniques avoids the need for external financing and reduces the financing gap. A good entrepreneur balances the cost of funding with the returns the business can earn. A good entrepreneur manages the gap between immediate demand and the firm’s funding needs.

By using bootstrapping the small business entrepreneur shows the ability to manage capital in an efficient way. The small business entrepreneur does not need to give up control to find external financing and can highlight his or her management ability. Bootstrapping shows the small business entrepreneur has the ability to manage relations with others including family, customers, supply-chain partners, banks, and suppliers.

The small business entrepreneur who employs this strategy shows financiers the ability to manage capital so these financiers are more likely to want to offer external financing. The best time to find financing is when the business least needs it. Showing this ability allows the small business entrepreneur to find external financing at more desirable rates without sacrificing ownership and control.

Please let me know why you need financing to start your business by leaving a comment. Do you want to learn more about how to attract financing to your business using this proven forumula?

References

Lam, W. (2010). Funding gap, what funding gap? Financial bootstrapping: Supply, demand and creation of entrepreneurial finance. International Journal of Entrepreneurial Behaviour & Research, 16(4), 268-295. doi: 10.1108/13552551011054480

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  1. #1 by Fred on May 9, 2012 - 8:19 am

    I am currently bootstrapping with my business (for the past Fifteen months). The financial freedom that I have is more than my peers (that are paying back loans). I see how stressed out they are to make enough money to pay back their loans while trying to live. Plus fighting with “a board member” that feels the business/organization should be going in a different direction than what the Founder/President wants.

    I personally think the wave of app developers (and other start ups) finding quick funding has diluted the bootstrapping philosophy. We business owners fall back into a “I can do that too” mentality and begin aggressively hunting down investors like wild game. Everyday we read about a business that went from bootstrapping on Monday to $24 million (dumped on them by investors) on Friday. Thus, everyone is looking to get rich quick by appealing to investors, yet neglecting the long term vision.

    I too have started falling for this. Thanks to your post, I will begin my “Investor Detox” and return to my bootstrapping ways. The untold truth about “monkey see monkey do” in business is the root cause of this Investor craze.

    Slow and steady wins the race.

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