Bootstrapping: Definition and Pros and Cons

Bootstrapping typically means relying on one’s self to reach a goal. In business, bootstrapping is generally used to describe entrepreneurs who use their own personal funds and resources to start a business instead of raising money through small-business loans or investors.

Whether bootstrapping is your personal preference or your best option to start a business, there are pros and cons to this funding method, as well as some alternatives that might be helpful to consider.

Bootstrapping refers to entrepreneurs starting new businesses by relying on their personal resources instead of securing funds through business loans or raising capital through investors. Or, in the case of an existing business, bootstrapping can be used to describe an entrepreneur using the revenue generated by their company, along with personal resources, to grow the business.

Some personal resources that may be used in bootstrapping include:

• Personal loans, including home equity loans.

• Personal spaces such as an extra room or garage.

• Personal assets like equipment and supplies.

For some entrepreneurs, bootstrapping is a personal preference and for others it may be their only option for launching a new business or growing an existing one.

Here are some reasons entrepreneurs may use bootstrapping to start their business:

One of the top reasons budding entrepreneurs turn to bootstrapping is because they can’t qualify for a startup business loan. They may not be able to meet lender requirements for time in business, credit score and annual revenue, among other things.

Banks and SBA lenders — lenders that offer loans guaranteed by the Small Business Administration — generally have competitive rates and terms. However, to qualify for funding, you’ll typically need multiple years in business, in addition to good credit. For example, a Wells Fargo BusinessLine line of credit requires a credit score of at least 680 and two years in business.

Online business loans are typically easier to qualify for than bank loans; however, approval can still be a challenge for brand-new businesses. For example, Fora Financial offers business loans for bad credit with a minimum credit score requirement of 500 but also a minimum of six months in business.

Entrepreneurs who could qualify for a business loan may choose bootstrapping because they don’t want to take on business debt and the interest expense and additional fees that come with a loan.

Business loan interest rates vary based on a number of factors. However, according to the most recent data from the Federal Reserve, interest rates on the average small-business bank loan ranged from 6.13% to 12.36% in the fourth quarter of 2023^[0]

In addition to interest, borrowers often have to pay fees like a business loan origination fee. Interest and fees may push the total cost of the loan beyond what an entrepreneur is willing to pay.

Entrepreneurs who have ruled out debt financing may have the option of raising money through equity financing — selling shares in their business to investors in exchange for funding. While equity financing doesn’t require taking on debt or making loan repayments, some entrepreneurs may still prefer bootstrapping.

When an entrepreneur sells shares in their business, they exchange partial business ownership for the investor’s funding. And, depending on the number of shares sold and the investor’s goals, the entrepreneur may no longer have full independence to run the company their way. They’ll also have to share the profits if the business succeeds.

Bootstrapping can allow an entrepreneur to try out their business model, refine their marketing strategy and build a customer base before committing to long-term financing or arranging to offer equity to investors. In addition, a business owner may find it easier to qualify for funding from business lenders after they’ve been in operation for at least six months.

Also, some entrepreneurs may not be comfortable quitting a full-time job in order to start a business. Bootstrapping can be a way to get a business off the ground without losing your main source of income.

The following tips may help you when bootstrapping your business:

Regardless of how you choose to fund your startup, you’ll need to write a business plan. The plan provides detailed information on your business, such as an executive summary, product description, market analysis, marketing strategy and financial projections.

Your business plan can be used as a guide to set up your business and help you identify your customer base, establish your marketing plan, lay out the organization of your operation and explain how you plan to generate revenue. You’ll typically update your business plan as your company grows.

In addition, if you decide to look for additional funding in the future, you can share your business plan with lenders and investors to show them that you have a profitable operation.

Bootstrapping may involve starting a scaled-down version of your business where, for example, you operate out of a spare room or use personal funds to buy supplies. However, no matter the size of your operation, you still want to take steps that will make your business official in order to best set it up for future growth.

Some common steps to take when launching a business:

Bootstrapping is often used to get a business up and running; however, it’s not always the best option for business growth. For some entrepreneurs, bootstrapping may be a short-term option that will help them secure business financing in the future.

Bootstrapping can give you the opportunity to accrue time in business, generate revenue and build a customer base — all things that will make your business more attractive to lenders and investors down the road.

There are organizations that offer free or low-cost training, counseling and other resources to help you start and grow your business.

• SBA resource partners are located throughout the U.S. and include Small Business Development Centers, SCORE business mentors, Veterans Business Outreach Centers and Women’s Business Centers, among others.

• U.S. Chamber of Commerce chapters provide resources for entrepreneurs including virtual events and networking opportunities within your local community, though a membership fee may be required in some cases.

• Industry and trade associations within your local community can provide opportunities to advance your industry knowledge and network through conferences and member events.

• Public libraries can also be a resource to small-business entrepreneurs, with some offering online courses, demographic information, business planning tools and suggested reading lists.

Here are some alternatives you may want to consider before deciding to fund your business on your own:

• Business loans. There are many different types of business loans — term loans, lines of credit and equipment loans. Because the qualification requirements for business loans vary by type and lender, exploring a variety of options may allow you to find a loan that works for you and your new business.

• Family and friends loans. Asking family members and friends to loan you funds or invest in your startup business is another way to raise money. Although these arrangements are often informal, it’s important to put the details of the funding in writing so there are no misunderstandings in the future.

• Small-business grants. Grants can be a source of funding for small businesses, although competition for this “free” money can be fierce and the application process can be time-consuming. However, there are startup business grants offered by government agencies, corporations and nonprofit organizations that may be worth looking into.

• Crowdfunding for business. Crowdfunding can be used to create online campaigns to raise money for a business startup, as well as other causes. A unique business idea and a wide network of supporters can help an entrepreneur launch a successful campaign.