With bootstrapping, entrepreneurs launch their businesses using as little external capital, such as loans, as possible. The funds come from either personal finances, such as selling assets, using savings or credit cards or from using revenue from the business once it gets going.
This is a very lean method of running a business, as entrepreneurs find the least expensive way to make a viable product or service.
If you do choose to empty your savings or use credit cards to fund your business, be careful because there is no guarantee the business will pan out.
Nikki Larchar and her business partner, Tina Todd, bootstrapped their company by pooling their finances and launching the human resources consulting firm SimplyHR about 2 1/2 years ago. She believes bootstrapping her business instead of getting a loan is a significant reason why she was able to turn a profit within a year after launching.
“For us, it’s been monumental being able to grow the business how we want to grow it and not have a looming loan over our head,” she says.
2. Crowdfunding Platforms
Here’s how it works: Entrepreneurs and small business owners create a 30-day fundraising campaign seeking investors in the company or project instead of going to a bank for money.
Usually, business owners reward individual investors with some kind of gift, product discount or, sometimes, equity in the company.
Last year, Larchar used Kickstarter to raise $10,200 to fund a comic book that human resources departments could use to teach employees about sexual harassment policies. They met their goal and launched in January 2019.
“[W]e were able to fully jump into the project a lot quicker than we would have otherwise,” she says.
3. Product Pre-Sales
An easy way to acquire funds if you’re operating a small business selling products is to hold a pre-sale in which customers pay for goods up-front. The business owner can use the money raised to fund the manufacturing of the initial batch of products.
“Product pre-sales is such a great strategy because you’ve just proven the customers want your product,” says Kedma Ough, the statewide innovation director for America’s Small Business Development Centers in Oregon.
4. Friends and Family
Friends and family may be a potential source for financial capital for your small business, but be warned: If the business doesn’t make it or falls on hard times, it might destroy the personal relationship.
Ough says she’s witnessed many cases where family members stopped speaking to each other because they went into business and things went south. “It doesn’t mean it can’t work, but I’ve seen enough in my lifetime [that] it’ll break your heart,” she says.
Taking on a business partner can be a way to secure funding in exchange for equity in your company. Depending on the arrangement, the partner might be an employee, someone not involved with day-to-day operations or just an investor.
If you are considering taking on a partner, write down every detail of the business partnership, preferably with the help of a lawyer. Define clear expectations and boundaries of what each partner can expect while running the business and worst-case scenarios of how the business would dissolve in the case of a partner dying or wanting to be bought out of the business.
6. Small Business Grants
Small business grants come from a variety of sources, including government agencies, nonprofit and for-profit companies. Government agency grantstend to have the most narrow eligibility requirements, as they often focus on businesses in the science, technology or energy industries that will bring direct growth to the community.
Grants from nonprofits may focus on specific types of business owners, such as women, minorities or veterans. Grants from for-profit companies often have the widest eligibility requirements and may be given out based on merit or by completing an application.
Your local Chamber of Commerce may have information on small business grants available in your area. The only catch is everyone wants free money, so these grants can be hard to come by.
“[Government grants are] definitely not something that most small businesses are able to get funding through,” says Priyanka Prakash, a senior staff writer at Fundera. “But if you think you meet the requirements, definitely spend time putting the application materials together because if you win, you get free money and it’s an amazing way to start out.”
7. Angel Investors
Just as the name suggests, the idea of having a wealthy investor come in and fund a startup can sound like the answer to an entrepreneur’s prayers. Angel investors can be affluent people or groups looking to fund startups.
P. Simon Mahler, a small business mentor with Score, a non-profit that advises small businesses, says people can search for angel investors by industry and by location — one such way is by browsing Angel Capital Association’s national directory of angel investors and firms.
Once you find a potential investor, it’s a long, thorough interview process with the entrepreneur and that person’s entire business team to make sure the business is viable.
“They’re very conservative, very selective as to who and why they invest in certain businesses,” Mahler says. “They want the sure thing.”
8. Venture Capital
Similar to angel investors, venture capital firms also provide funding to small businesses and startups early on in development. The difference is the speed with which they operate and what they ask for in return. But that speed comes at a price.
Mahler says venture capital firms are very niche in what they invest in and are aggressive once they decide to invest. For example, angels may offer advice with their funding, while venture capitalists may ask for equity in your company and request specific changes in your business model.
“You’re giving away a lot to get a lot,” he says. “That’s what a lot of people struggle with is that it sounds good to have VC [venture capital] money, but you’re giving away a huge chunk of the ownership stake in your business.”
If you think your business may be of interest to such firms, start by asking your network for personal recommendations. You can also opt to make a profile for your business on AngelList — a national platform for job seekers, angel investors, entrepreneurs and venture capitalists alike.
9. Online Alternative Lenders
Online alternative lenders have become a popular business financing option versus getting capital from traditional bank loans. Online alternative lending companies, such as Kabbage, OnDeck or BlueVine, are a convenient and fast way to get funds. There is no need to go to a bank to apply as everything is done online and funds can be deposited in a couple of business days.
Just like loans, online alternative lenders also offer business lines of credit, where instead of providing one lump sum of money up-front, you can use as much or as little as you need within your limit.
But the downside to using one of these lenders is that doing so can be an expensive way to borrow money. Prakash says the interest rate of a bank loan may be 7%-8% while these online lenders may charge up to 60%-70% in interests.
“It’s definitely a trade-off between how quickly or badly you need the capital versus how much you’re willing to pay for it,” she says.
10. SBA Loans & Banks
The U.S. Small Business Administration has a program to help business people get financing after they demonstrate success for a few years. SBA loans come with a guarantee that the loan will be repaid to the lender. If the business fails to pay back the loan, the government will pay the lender, which could be, for example, a traditional bank.
“It’s a way to take some of the risk off the lender, and it encourages banks to lend to more small businesses,” Prakash says.
The only catch is these loans are rather difficult to obtain for startups. “If your business is a couple of years old and generating good revenue and is close to a profit, then it’s a much more viable option for a small business loan,” she says. You can go to SBA.gov to find out if you qualify for an SBA loan.
For entrepreneurs with not much experience under their belts, the most obvious place to obtain a business loan might not be the place to go.
Traditional banks want to make sure they’ll get their money back, so they’ll only work with what they’d consider a sure thing. This means unless you’ve been in business for a few years or have a track record of successfully starting small businesses, banks may not consider you for a loan.