Do you plan on financing your business by bootstrapping? Then you need to know the pros and cons of your decision.
Bootstrapping is one of the effective ways to self-finance a start-up, especially for budding entrepreneurs who have no means of securing start-up capital.
Moreover, it is very achievable to start a business with just your savings.
This process is called bootstrapping.
Although bootstrapping is a very safe route for generating revenue, it is not without downsides.
Hence, we will educate you on the pros and cons of bootstrapping.
This will ensure that you are well-informed before you venture into this form of financing for your business.
First, let’s explore the concept of bootstrapping.
What is Bootstrapping? Pros and Cons of Bootstrapping
Bootstrapping as a term in business or finance is a process of utilizing already available resources for business financing.
This includes assets such as income and self-knowledge to grow a company.
This term originates from a popular old tale from the 19th century that implied pulling yourself up from the floor by just your bootstraps.
A deliberate act of diligence that requires self-trust to achieve.
This technique enables you to build and scale your business from scratch without involving external influences.
It requires stretching and flexing minimal resources to achieve the company’s vision.
It is a self-referential method of growing a business that requires being the brain to all monetization concerning the company.
Bootstrapping is also a very legitimate way of making business owners cherish the resources they possess.
This method of funding a company does not require owing huge debts or borrowing money from financial institutions.
It also does not require the harrowing process of paying back.
There’s also the pressure to meet up with regulations even when they are not attainable.
Bootstrapping will basically require that the company depend mostly on internal resources, credit cards, and company revenues.
Furthermore, although bootstrapping entails limited funding possibilities, it still gives you autonomous rule over your business.
Did you know that many successful companies like Apple, Amazon and even Microsoft started as bootstrap businesses?
They all began in their garages with just a handful of eager helpers.
These entrepreneurs weighed the pros and cons of bootstrapping to determine its outcome.
Also, they established the basics of putting out relevant products that people would want to buy.
Once they were ready, they accepted funding from investors to help them broaden their coasts.
This is proof that bootstrapping is a growth-friendly approach or strategy to business.
Another effective way of business financing is venture capital.
Bootstrapping and Venture Capital Compared
In contrast, all these tenets of bootstrapping paint quite a parallel picture to the phenomenon of venture capital.
Venture capital involves bringing in external financial investors to help in funding your business.
This support may not come in the form of income but managerial skills and techniques.
At the end of the day, the business’s leadership becomes divided between investors and business owners.
There will even be drawn-up agreements to split profit into whatever percentage is agreed upon.
If you were a business owner, what funding method would you go for; the bootstrapping method, right?
Well, before you make this choice, here are the pros and cons of bootstrapping.
First, the pros.
Pros of Bootstrapping; The Pros and Cons of Bootstrapping
This is a major benefit of bootstrapping in business.
When business owners fund their businesses through venture capital, there is no autonomy of leadership anymore.
One of the criteria for getting venture capital funding is to transfer control over to investors.
Therefore, decision-making ceases to rest solely on you.
Even though the company is yours, there has to be a consultation to make decisions.
However, in bootstrapping, you still maintain complete leadership with your board of directors.
This is because you have not involved loan sharks and financial institutes.
Just imagine having to share decision-making with many people who are only interested in making their profit.
That will be a problem as the values and goals of the company will not be coherent.
Also, even if you got entangled in a lawsuit, they will win and eventually take superiority over all your hard work.
So, without venture capital, you are not answerable to a bunch of hungry exploiters.
This is the reason why bootstrapping is much safer for start-up business financing.
Bootstrapping is Limited Pressure – Pros and Cons of Bootstrapping
It is unhealthy working under immense pressure as a new business owner.
This is going to be really difficult because new businesses take time to generate profit.
However, this will be your fate if you settle for other sources of business financing such as financial loans, venture capital, etc.
You’ll be under pressure to pay back debts, doing the venture capital investors bidding, in addition to running your business.
However, the pressure to pay back any huge loans or fulfill financial obligations is eliminated with bootstrapping.
Consequently making bootstrapping one of the best forms of business financing.
No Need Reporting to Established Structures
With venture capital funding, there’s always the need to answer to rigid systems.
These systems are often established to screen each company’s decisions.
Although it may check illegal activities and promote transparency in the enterprise, decision-making will be much slower, passing through different channels.
It also undermines the authority of the business owner.
Also, this act will be an advantage to investors as they can easily discard decisions that do not favor them.
In contrast, bootstrapping does not pose this kind of delay to entrepreneurs as you can make and implement decisions much faster.
This method of funding will, in fact, hasten the process for daily productivity.
Funding Source is Stable – Pros and Cons of Bootstrapping
Not all businesses stand a chance to receive funding from investors by venture capital.
This is why bootstrapping is probably the best choice for small business financing.
Indeed, you may only be able to fund your business through your savings or first profit.
However, at least you know where money will be coming from.
This can motivate you to work harder on your business, knowing that the funds can only come from your profits.
Above all, venture capital is not a reliable way of funding your business because it may not be available to you when you need them the most.
The only trusted source will have to come from your hard work, which will always be available for you.
No Unnecessary Debt – Pros and Cons of Bootstrapping
Bootstrapping requires that you use only available resources to finance your business.
However, when you seek help from external sources, you may be left with a tall list of debts to pay back.
Even more, the profits you make might not be enough to cater to the company’s financial issues; talk less about paying back debts.
Also, one of the most tragic things that can occur in businesses is the inability to pay up debts.
When this happens, the company may be liquidated, or subsequently, ownership of the business will be transferred to these investors.
No business owner wants to see their hard work taken away by loan sharks.
Bootstrapping makes the business much more valuable, profitable, and arable because you can channel back the profits you make into the business.
Overall, bootstrapping make businesses much more favorable to investors and financial lenders in the future because they have none of those financial mortgages to pay up.
No Need to Find Investors – Pros and Cons of Bootstrapping
Finding investors is another hurdle that every company that uses the venture capital method needs to overcome.
This challenge comes with lots of paperwork, legal formalities, and prerequisites that may be hard to level up.
Another issue with finding investors is that even if you do, you’ll need to fulfill certain criteria before you’re granted your request.
Therefore, you only get funds for the business based on your performance.
Even if these supposed requirements may not be healthy for the enterprise, you have to do it.
However, bootstrapping your business through your personal income or company profits eliminates having to work on the clock to qualify for something like that.
Above all, the main idea that characterizes bootstrapping is knowing that the future of your business hangs on your sweat and diligence.
Bootstrapping Makes You More Experienced and Competent
Lastly, the rewarding achievement of deciding to finance your business by bootstrapping makes you a lot more competent in handling challenges that the business world has to offer.
You have successfully started your business all by yourself.
Imagine what you will accomplish when you eventually have investors by your side later on.
Bootstrapping literally allows a business owner to try out firstly with just his capacity by pulling himself up by the boots.
You will build a much stronger foundation with full leadership, learn from failures and setbacks without having to impress shareholders.
This is a great exercise for building a strong character that will go heads against competition, losses, and risks.
Now let’s examine the cons of bootstrapping.
The Cons of Bootstrapping
Not Suitable for All Situations – Pros and Cons of Bootstrapping
Bootstrapping may not be appropriate for some business situations because some businesses do not have the luxury of growing gradually.
Such businesses will be stamped out if there is no rapid growth.
Although bootstrapping builds company character and its legacy, however, the competition in the open market can be quite tough.
The failure to deliver needed services will reduce the company’s relevance to the public.
It is in situations like this that venture capital is needed to sweep the company right up and give it a chance to show its potentials.
Growth Will be Much Slower – Pros and Cons of Bootstrapping
With no sudden cash flow insight, the growth of the company will be slow.
Remember, in bootstrapping; you are banking only on your income and internal resources.
You will need to make a certain amount of income before you can implement visions.
Also, with limited funds, you may be unable to afford Google and other established media platforms to market your product.
In fact, without profit and interests, the business may come to a complete halt.
Compare this con with having financial backup from capitalists.
You will carry out operations much easier and faster, which will affect the growth of the business positively.
Furthermore, even if customers patronize you constantly, you may be unable to keep up with their ever-increasing demands.
This is a con of the bootstrapping approach.
There Will Be No Help Managing Risk
Even though bootstrapping is a great measure to take when trying to avoid risks, it can be a very tedious adventure.
When you eventually suffer any loss, it will hit you much harder than the possibility of getting back on track will be slim.
Having a team of skilled financial lenders to help you fix issues could give you a surer future to continue the business.
These people have the ability to salvage even startup businesses when they hit rock bottom.
Their presence in your business gives you an exit plan.
However, with bootstrapping, the business’s chance of survival is slim.
Bootstrapping does not Provide Room for Networking – Pros and Cons of Bootstrapping
Another disadvantage of bootstrapping is that it does not allow you to mingle with other financial companies.
Focusing on your business entirely will not allow you to create a network that could fire up your business.
One of the benefits of venture capital is that they try to build an alliance with the companies that they finance.
Imagine having the knowledge that comes from associating with people with the same goals and vision as you do.
Several financial offers from working with these lenders will present themselves.
These people could also help you build an efficient team of hard workers who will help you excel in the field.
There will also be a reasonable amount of exposure to help bring your startup out of its shell.
The added publicity will be just what your startup needs to get the attention of customers.
Bootstrapping May Not Encourage Diligence
In venture capitalization, a startup should be well screened before it can be fit for funding.
All your business plans and basic strategies would be surveyed to determine if the business is here for the long run.
Even though this process may take a while, it will save the company a lot of pitfalls.
All of these pressures will push you to be more diligent by looking into business policies crucially before presenting them to the board.
Final Words on Pros and Cons Bootstrapping
We have established bootstrapping as one of the most effective ways of funding your little business.
We have seen that the pros and cons of bootstrapping clearly are unbalanced, with its pros leading the way.
So, this is definitely a green light.
It is a way of trying out your capacity to thrive as a business owner.
If you do not need all those complications of drawing up legal documents or cannot afford to be in huge debt, bootstrapping is for you.
However, its flaws can be crippling.
Being able to prepare for the pros and cons of bootstrapping is an important measure to take.
Hence, with the information we just shared, you should be able to determine if bootstrapping is the way to go for your new business.