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How to Bootstrap a Business

Expert Advice on Bootstrapping Your Business From the Ground Up

 

Expert Bootstrapping advice

 

I’m a bootstrapper, and this is my story on how to bootstrap a business. 

Bootstrapping is when an entrepreneur starts a business with little money and no outside investment or funding. Bootstrapping is when someone tries to create and build a business with their own money or the new company’s operating profits.

Bootstrapped companies are run by aspiring entrepreneurs who need to create positive cash flow quickly to eliminate the initial pressing need for external funding. It is a simple business idea. Create a business model or business strategy with limited resources using personal savings as the initial financing option.

 

 

 

 

 

PROS

  • Bootstrapping is inexpensive, so there is usually a low barrier to entry.
  • Because you’re your own boss, you get to make the decisions,
  • You have the autonomy and flexibility to grow your company.

 

CONS

  • You might have a cash flow problem.
  • If there are multiple founders, equity issues may arise.
  • The possibility of failure is high.
  • You may notice an increase in your stress levels.
  • The bootstrapping entrepreneur must become resourceful as a lean startup and develop a versatile skill set to solve problems without outside financing.

 

Ryan Holmes Hootsuite Quote on Bootstrapping

 

I self-funded all my startup companies, and I did it all. Owner, employee, marketing officer, financial officer, customer service, and sales rep all simultaneously. Wearing all the hats gets you to understand the potential customer real fast, and you soon find out if you have a minimum viable product. 

Did they all make money?

No!

Have I won more than I’ve lost?

Yeah.

Here’s how I did it. I hope this article gives you the trials and tribulations of starting your own bootstrapped business and the confidence and motivation to do it. 

To build your dreams.  To Live Your Dreams.

 

Live Your Dream

 

 

Let me share some quick ideas on how to bootstrap and launch your idea. Each has an intrinsic risk and reward.

  • Funding a project with personal income and savings.
  • Use credit cards.
  • Sweat equity refers to a party’s contribution to the company based on their efforts and not their capital contribution.
  • Maintain as low an operating cost as possible.
  • Inventory necessitates rapid turnover.
  • Subsidies include cash payments from the government or tax reductions.
  • The money needed to run the business comes from sales.

 

The term “bootstrapping” means doing things on your own, without the assistance of others and outside sources. It frequently means the difficult way, which most people mean when they say bootstrapping.

As a startup founder, it is the process of starting a business with only the money you have on hand, including savings and loans. It may be from credit cards, retirement savings, or family and friends. 

You can interchange the term as “self-funding.” Independently funded businesses don’t have conventional sources of outside capital like private equity, venture capital firms, crowdsourcing, and traditional bank financing. 

According to experts in the startup community, bootstrapping is a common way to raise money for new businesses. 75-85 percent of companies start by bootstrapping.

And honestly, who are we kidding when we talk about private equity. 

Unless you’re the next Mark Zuckerberg, Jeff Bezos or Steve Jobs and Steve Wozniak, the odds of getting private equity or an angel investor is slim to none.

SharkLet’s put it in some perspective. About 40,000 apply to get on Shark Tank each season. 

Less than one percent (less than 400) get to go on the show. 

Here’s the kicker (are you sitting down?)

It doesn’t matter if you make it into the Shark Tank or not; you’ll have to pay a 2 percent equity or 5 percent royalty fee to the Sharks no matter what.

50% – 60% get a deal of those that make it into the tank.

But wait! 

There’s more. 

A whopping seventy-three percent did NOT get the same deal they accepted on TV. 

NEW BUSINESSES IN THE UNITED STATES TEND TO BE SELF-FUNDED

According to experts, the United States has approximately 4 to 5 million new businesses each year. According to the SBA, about 30,000 startups receive angel investments (maybe ½ percent), and about 1,000 receive VC funding (.02 percent). 

The odds are not good.

Estimates are that only around 60,000 new businesses each year are given SBA-guaranteed loans from banks that include collateral such as your house.

That’s a whopping 1.2%!

That these figures are so low supports the general idea that most startups and small businesses do not receive outside funding. 

That’s a staggeringly low number.

Considering the low number of startups that receive outside financial support, some have argued that the term “startup financing” is an oxymoron.

Some people believe that bootstrapping makes you appreciate your business even more because you put so much of your own money into it. 

The prevailing thought is that individuals on the team will perform at a higher level if they know you bootstrapped your company. My opinion, from experience, is that most of the team doesn’t care, and they are not “invested” in your business like you are. 

We keep it real here. 

But I do agree that when the going gets tough, and it will get tough, every victory you notch will be even sweeter because of it.

I’m either fortunate (or lucky). lucky in businessAfter many successes and duds, I took what many would believe as huge risks. Looking back over the years, I did take a lot of chances. Some might call me crazy; some may think it’s admirable. Honestly, I never thought either.

Here’s a quick background. I was the antithesis of business through graduate school. I’d get into tremendous discussions (really arguments) with the MBA students at the University of Chicago, where I studied psychology. While they talked about their starting six-figure salaries, I spoke about helping humanity. They were strait-laced with button-down suits and ties, and I wore jeans, tee-shirts and seldom cut my hair.

I worked for several years, right out of grad school, as a psychologist. While my buddies were “moving on up,” buying new cars and affording things I couldn’t dream about, I was working below the poverty level. 

Why? 

EVERYONE KNOWS YOU HAVE TO PAY THE PRICE TO BE SUCCESSFUL

I decided to make a significant change and leave the world of people’s problems to work with people’s money problems. I gave up my long hair and jeans for a career on Wall Street and spent almost seventeen years working my way up as a broker, branch manager, and director of compliance for an investment banking firm. 

After watching the dog and pony shows parade, I knew that these CEOs and business founders going public got dressed the same way I did—one leg at a time. I was tired of working for someone else and decided that I’d be much happier working for myself. 

So here is my dilemma.

Jump into business“Jump right in” or “slow and steady.” 

These are the two most common options when aspiring entrepreneurs contemplate striking out independently. Some believe it is better to quit your job and start your own business right away, while others believe it is better to take a more measured approach and build your new business on the side before switching careers.

Assuming that your business is up and running, the “textbook” answer is to see if its revenues can cover your wages. You should consider quitting your job as soon as the company can pay your living expenses.

I thought I’d “transition” to replace my six-figure income, and I’d work it nights and weekends and build it up. I know how to multi-task.

That lasted for maybe a month. I quit and never looked back. I took five thousand dollars and bought some inventory and the rest, as they say, is history. 

I built a sales force of nearly one thousand reps nationwide and more than doubled what I was previously making. 

Was it easy? 

You be the judge.

What stands out in my mind is the first two months. It wasn’t just quitting and doing something else. I had a family, mortgage, expenses that still needed paying. 

On the second to last day of the first month, I had $0.00 sales and my bills (over $10,000). So, I went into” broker” mode, got on the phone, and sold like crazy. Same for month two. 

Second to last day both months no sales – next day, covered all my expenses. 

Two months in a row. I’m on a roll. 

By month six, I’m now making mid-five figures – a month!

Sounds romantic unless you’ve lived with the stress and sleepless nights and the haunting question, “What the f#ck am I doing?” 

Is this a HUGE mistake? 

Focus? Determination?

NO

I LIVED BY TWO SIMPLE MOTTOS

work half days

And for those days that needed a little more,

eight till faint

 

That’s it! I did this six, sometimes seven days a week.

 

Thomas Edison Success Quote

Next up, I discovered the internet. That’s right, and it wasn’t Al Gore (contrary to his claims).

A good friend called me up at the time and asked me what I was doing. Since timing is everything, and I was looking for something new, he asked me what I knew about the internet.

I told him the truth – nothing. (It’s 1997). 

He asked me if I wanted to learn it together with him.

“Sure.”

We both worked 40-hour weeks trying to figure out how to make money on the “net.” Talk about the wild, wild west.

Internet marketing is now part of our strategy. I used a $5,000 American Express credit line to get my feet wet, trying to play the 30-day float game. Before long, I was racking up charges on my credit card of $300,000 per month!

If something had gone wrong, I would have been unable to pay my bills. I must say, it was money well spent! I averted a disaster because of my good fortune.

The question that still haunts me to this day…

“Are you willing to give me your home if you fail?

Next up, I started doing online microlending by borrowing $20,000 on a credit card. The only challenge is I don’t have the capital to lend. If I don’t raise the money I will lose the $20 grand. It’s about risk and reward.

Am I willing to risk $20,000 to make 100X my money? It’s not about swinging for the fences with your eyes closed. The investment was a calculated risk. For me, failure wasn’t an option. I knew I only needed one swing at the plate. I just sat back and waited for my pitch. And I got it!

I remember it like it was yesterday. It was a Tuesday evening at about 8 PM. After explaining my plan in detail, the lender asked me how much I needed, and I told him $10,000,000.

He said I’ll start you off with one million dollars, and my lawyers will draft the agreement tomorrow. I just have one last question.

HERE’S THE ONE QUESTION THAT CHANGED EVERYTHING

The loan officer asked me this question, and I’ll never forget it. 

“Are you willing to give me your home if you fail?”

I had no choice but to agree. What was I supposed to do? What choice did I have? 

However, it wasn’t that I said “yes,” it’s the fact that I said it quickly and confidently without any hesitation. 

Understand that I didn’t even ask my wife. I just said “YES. “

If I wasn’t quick to the draw, no securing the $1million, and I just lost $20,000.

Oh, and did I mention that the interest rate is 45% annually? 

Now you may say that’s crazy. But here’s what all successful entrepreneurs understand.

They understand their numbers. 

Over the years, I can’t tell you how many owners I’ve dealt with will initially balk at the interest rates they have to pay to secure a loan. Mind you, it’s not like the money is free, and there is no risk. Regardless of the rate, you pay back the principal, right? The rate is the cost of the business. It’s an investment.

I ask the same question every time. What’s the money going to do for you? If I give you $10,000, what will it be after giving you the money? Not knowing the answer tells me you’re clueless. 

You must know your return on investment (ROI). How do you have the kahunas to ask for the money and not know what you’ll do with it? And what does that mean to your company?

Back to the 45%. I know my ROI is 720% annually, so if all goes to plan and I must give up 45% to make a 675% return, is it not worth it? Read about the real-life farmer’s true story below, and I rest my case.

You have no idea how many times my sheets were wet at 2 or 3 in the morning because I was worried about whether I would be able to make that month’s rent payment, thinking about what if… 

What if this month’s marketing is a flop? 

What if our forecasts were wrong? 

What if something unexpected happens in the market?

I’m not ashamed to admit that I was apprehensive. Some nights, you may experience it as well. They were pure hell. It’s a real challenge, to put it mildly. In addition, it’s challenging to know that if the business fails, it’s not just the business. Your company is like a child to you. If you’re thinking about losing, that’s hard enough. It’s bad enough to lose your home. Is it worth risking your family’s income?

Sleepless nights in business

You may have been in a situation like this before. Some people wake up in the night fearing they won’t pay their bills. Thoughts of losing everything you’ve worked for, including your family, home, and car, race through your mind.

Within 18 months, I turned a $20,000 credit card cash advance and a $1 million loan at 45% interest into an $18 million a year business and successfully sold it. 

How do I manage the risk of starting a business? The approach I take parallels my 17 years of Wall Street experience. I look at the business opportunity as an investment. In simple terms, I consider the monetary risks and the financial rewards. 

THE MORAL OF THE STORY

The lender told me the ONLY reason he lent me the money is that I didn’t HESITATE for one second when he asked for my house. That was it!

If you are a business owner and need money, and someone asks you to guarantee it personally, 

DO NOT HESITATE.

As a lender, I can promise you this: if you’re not that confident in your business, why should I be willing to give you the money. 

Think about it. 

You want me to hand over the loan you’re seeking, but you don’t have the backbone to say you believe in yourself.

That may be harsh, but it’s reality. 

TRUE STORY: Yesterday, a farmer who owns 800 acres was having a bit of a hard time. He had Covid-19, and it wreaked havoc with his farm. He’s laying off his 36 employees and is starting to miss some payments. 

He comes to me after being declined by 20 different lenders. He owns a significant amount of farm equipment free and clear. After careful evaluation, we decide to lend him $900K. Remember, he only needs $250K for maybe 60 – 90 days when a large receivable comes in. 

We offer him $900,000 for a four-year term loan at 15% interest, and he can prepay after 24 months.

He declines the offer. Why? The interest rate is too high, and he doesn’t want to pay a loan for two years. 

He’s about to lose a 25 year plus business that does well into the 7-figures in annual revenue. He clearly stated that he pulls the plug this week if he doesn’t get the money. 

Guess what? 

Stick a fork in him. If he doesn’t believe in his business enough that he can’t figure out how to use the money he needs, plus another $650K (possibly), then I no longer believe him. 

I call BS – something else is going on.

I don’t want any part of that. Good luck!

HOW DO I MITIGATE THE RISKS?

Here is the first question I ask myself. How much capital am I willing to invest, and what is the potential percentage of profit or return on investment? 

I think of the business as an opportunity, and I think about the investment no differently than purchasing a stock. What amount of money would I invest and risk in a stock to realize an absolute gain?

That’s the easy part. 

The tricky part is determining how much you are willing to lose, and the challenge is knowing when to cut your losses. Whenever I make an investment or think of starting a business, I calculate how much I am willing to invest. Perhaps more importantly, how much can I or am I willing to lose. 

When to Close Down your Business?

When do I call it quits?

You must be highly disciplined to accomplish this. It’s unfortunate, but most people lack the mental fortitude to follow through on their decisions.

Most people have a problem by becoming emotionally invested in their businesses. Your desire to be “right” and your desire to make money become inextricably linked. Your willingness to be “right” becomes more important than your desire to make a profit.

It’s game over.

Walt Disney Quote

Starting a business and then shutting it down is like buying and selling stocks.

This approach has worked well for me. You need to know your numbers and how long you can last with the churn rate you have now. Lost money is acceptable. Losing all of it and not having the ability to try again is not.

“Go big or go home” is my motto.

And yet, this does not mean going home empty-handed, and it doesn’t mean that you cannot cut costs, make layoffs, or downsize.  Take a knife to the fat if necessary to get through another day.

Mark Cuban half full or empty quote

How Running a Business Affects Your Finances

Warren Buffets Rules to Making Money

– Warren Buffett, business magnate, investor, and philanthropist.

Small Business Owners and Financing: The Truth About Being Your Own Boss

Being the boss sounds like a great idea, doesn’t it? The thought makes great storylines in best-selling novels and Hollywood. We read about the Unicorns in San Francisco and Silicon Valley startups, and we read about the young, barely out of college kids crushing it with the latest and greatest piece of software. 

Alex Atallah, the co-founder and CTO of dominant NFT marketplace OpenSea has helped his company reach $300 million in revenue, up from less than $1 million last year. Now he’s on track to become one of crypto’s newest billionaires. 

Scott Kazmierowicz and Michael Spelfogel started Cardless in 2019, creating software that lets brands launch their co-branded credit cards. Cardless has raised more than $50 million and is valued at $315 million, according to PitchBook.

Indico Data cofounder Diana Yuan and Madison May, and Slater Victoroff worked from 5 p.m. to 5 a.m. Sundays in an Olin College dorm room eating pineapple and onion pizzas while building their product, which, with $36 million in funding, is increasingly a critical player in digital transformation.

Sounds easy, right? (You can read more here)

THE BEST ALTERNATIVE FINANCING OPTIONS FOR YOUR COMPANY

Business Credit Cards

Sometimes all you need is an excellent personal credit rating, and you can qualify for business credit cards. If you don’t have the best credit in the world, but you know someone who does, talk to them and work out a deal. You can get up to $250,000. 

A “business credit card” is a credit card used only for business transactions in the business world. 

If an owner has bad credit or none at all, their application for a business credit card is likely to be denied. You can establish credit for your business, earn rewards and bonuses, and keep business and personal expenses separate with a business credit card. Having quick access to funds is also advantageous.

If you have high-interest rates and fees, it’s essential to keep an eye on your balance and make all of your payments on time. If you use your company’s credit card to make an unauthorized purchase, the impact on your credit may be severe. 

Personal Credit Cards

Ditto for everything above. To fund their businesses, many small-business owners rely on personal credit cards. On the other hand, doing so could put you at risk if your business ever gets into difficulties. Credit card user beware.

Crowdfunding

It is possible to raise money through the help of online backers (crowdfunders) using a crowdsourcing platform. There are three kinds:

  • 1. Reward Crowdfunding – Those who donate to your reward campaign will receive perks like early access to your product or service or exclusive experiences.
  • 2. Debt Crowdfunding – Lenders can earn interest by loaning a portion of the money and then collecting it when you can afford to repay the debt.
  • 3. Equity Crowdfunding – The outside investor and supporters can invest in the company in exchange for equity or the promise of a future profit.

Look at Kickstarter and Indiegogo for examples.

Invoice Financing

Unpaid invoices can be sold to a lender for a percentage of the payment due in advance through the process of invoice financing. Lenders charge different fees, either a set amount or a percentage. It’s common practice for you to pay the lender and receive any remaining funds when a customer pays an invoice in full. 

The challenge here is it does not provide the capital necessary to start, and it assumes you’re up and running, and I don’t consider this a bootstrapping option.

Merchant Cash Advance

Merchant cash advances are one-time loans where the business receives a lump sum of money paid back over time with interest. Payback is a percentage of daily sales, which means that if your business is slow in sales, you’ll have to make smaller repayments than if it’s booming. Again, not for starting, but some will provide money after three to six months in business. 

SBA Loans

The U.S. Small Business Administration (SBA) has several loan programs to assist small businesses. Instead of serving as a direct lender, the agency usually partners with other financial institutions to make loans. The SBA provides loan guarantees and sets standards for the loans. It is important to note that each program has its own set of eligibility criteria to meet before a loan can be approved. In general, the SBA’s 7(a) Loan Program for small business loans is the most popular SBA loan program. 

As stated above, the percentage gaining access to this funding is relatively small.

Venture Capital and Angel Investors

Venture capital (VC) and Angel funding may be necessary to get your business off the ground depending on your business plan and goals. Individuals or organizations typically make venture Capitalist investments in exchange for an equity share of the startup venture.

Venture capitalists and angel investors mean you won’t be the only ones making decisions about the company.

Most small business owners fail to qualify for a small business loan which is a part of the requirement needed to keep business running. 

Staggering data released over the years has revealed that about seven in ten small business owners feel the “American dream” of owning and running a successful business has become harder to reach due to the inaccessibility of funds needed to drive businesses forward. 

Couple the challenges of getting money to start and operate a business with economic calamities like the great recession in the mid-2000s and Covid-19, and it adds up to one big FUBAR.

How Difficult Is It to Get a Business Loan Today? 

A new survey revealed that 72 percent of the 2,000 small and micro business owners examined face several challenges mitigating against their business outfits, thus plunging them into the conclusion that running a successful business has become harder than initially thought out to be.

The research conducted by Lendio revealed that the biggest problem Small Business Owners are faced with revolves around the challenging economy and access to financing options. At the same time, other factors like hiring and keeping talented employees impact success.

When most business owners answer the source of finances invested into their businesses, about 77 percent of the small business owners admitted to starting and funding their companies with personal funds. In comparison, 34 percent of the sampled populace revealed that they sought bank loans. Another 16 percent of the population admitted borrowing money from friends and family to finance their business.

With small business maintenance and running being a challenging task, recent studies have revealed the advantages of taking loans and debts as 

Seventy-eight percent of business owners believe a business can be maintained by bootstrapping and self-financing. 

At the same time, about three in four of the research respondents, who comprise 71 percent of the total population, revealed that taking loans and debts can lead to more growth.

How Much Do I Need in Loans for My Small Business? 

According to the research, the current data revealed that an average small business owner had taken about $72,271 in loans to run their businesses. In contrast, one in four business owners has shown that they took more than the average loan amount. 

Despite the figures, about 40 percent of respondents revealed that they could borrow as much money as they wanted, while 35 percent said they felt underfunded and underserved. It is important to note how much you can afford when taking out a small business loan. 

Biting off more than you can chew is a significant cause for business failure in the long run, as the borrower may be unable to pay the costs of running their business, plus payments on a loan with interest. 

With the growing stiffness of small business owners when seeking loans to finance their business, business owners have been channeled into other credit sources.

Here are the top 9 ways small business owners fund their business

1. Personal funds – 77 percent

2. Bank loans – 34 percent

3. Funds from friends and family – 16 percent

4. Other sources of funding – 11 percent

5. Donations from family and friends – 9 percent

6. Online financial lenders – 4 percent

7. Angel Investors – 3 percent

8. Venture Capital – 3 percent

9. Crowdfunding – 2 percent

Here are the top 10 challenges facing small business owners

1. The economy – 40 percent

2. Hiring the ‘right fit’ employees – 38 percent

3. Finding and retaining customers – 35 percent

4. Financing issues – 31 percent

5. Health insurance for employees – 30 percent

6. Government regulations – 30 percent

7. Trying to do it alone – 28 percent

8. Lack of time – 26 percent

9. Understanding tax code – 23 percent

10. Staying current – 21 percent

Here are the top 10 elements of the modern American dream

1. Homeownership – 48 percent

2. Freedom to live how you please – 48 percent

3. Starting your own business – 29 percent

4. Having minimal debt – 29 percent

5. Retiring eventually – 24 percent

6. Becoming wealthy – 20 percent

7. Having a job in the field you went to school for – 18 percent

8. Graduating college – 16 percent

9. Having children – 11 percent

10. Upward social mobility – 11 percent

 

I remember seeing a sign on the desk of a top producer back in my Wall Street days.

It read:

No Pain, No Gain. No Guts, No Glory.

Mark J. Kane is a successful entrepreneur spending the last 16 years lending money to business owners. Beginning his career as a psychologist, at the age of 23 he became the youngest Hospital Admin running a 100+ bed facility. He built two businesses to over 500 employees and a business from scratch to over $18M in revenue in 18 months before selling. This experience led him to begin Sunwise Capital.

Take Your Business Further With A Loan From Sunwise Capital