Bootstrap Financing during the Slow Economy

Bootstrap financing can sometimes be the only way to keep your company afloat during a slow economy.

Bootstrap financing is when the owner of a start-up company funds the costs and expenses of the company from their personal savings, credit cards, or from family loans. They do not seek investment or angel funding from outside sources. Bootstrap financing has both advantages and disadvantages.

Advantages of Bootstrap Financing

The number one goal of any start-up business owner is to secure enough financing so that their company can keep the doors open long enough to turn a profit. Business owners do that by finding financing anywhere they can, including outside investors and angel funds. The problem with outside investors is that they often require a large piece of ownership in the company. This means the owner of the start-up may need to relinquish a good amount of control and even the decision making power in exchange for the angel financing. This is typical in high tech start-ups and other companies where large capital outlays are needed for equipment and marketing. By bootstrapping your company and providing all the funds yourself, you eliminate the need for outside funding and retain complete ownership and decision making abilities.

Another advantage of bootstrap financing is that your company will have less debt than if you took on a loan from a bank or private lender. This will allow you to keep all the company's profits without having to make expensive debt payments. As a business owner, its always important to think about an exit strategy and bootstrap financing will improve your market position when the time comes around to expand your company or sell. Without high levels of debt the company will be more attractive to potential buyers down the road. 

Disadvantages of Bootstrap Financing

Without outside funding the business owner is forced to come up with all the company financing themselves. If they do not have another income source it may be hard to sustain business expenses along with personal expenses the owner may incur. If the owner does not have well capitalized family and friends they may not be able to borrow enough money to keep the company afloat. The Small Business Administration (SBA) estimates that 33% of all start-up companies fail within the first two years of operation. They cite the number one reason for failure as not having enough capital to sustain the business until they turn a profit.  The ability to sustain high levels of expenses with low levels of funding is a major disadvantage of bootstrap financing.

Operations can also suffer when bootstrap financing is the only method of caital influx. Many small business bootstrappers have found that certain parts of the business suffer when money is tight.mFor instance, a business that has expensive inventory demands may see their marketing suffer as a result of needing all their cash to buy or build product. Other businesses that work on contract may need all their cash to manufacture product and not see any income until delivery of the product occurs. In these situations, product returns can cause havoc on a bootstrapped business balance sheet.

In slow economies such as the one we're seeing now, loans and angel funding may be out of the question, making bootstrap financing your only option. Before you decide to go down that road, make sure you have done a thorough market analysis, business plan, and that you understand exactly what your costs will be until you can turn a profit. In that way, you can determine if your current levels of income will allow you to successfully bootstrap finance your company without later having to get into debt or worse; be forced to shut your doors.