Bootstrap Financing: Overview, Advantages and Disadvantages

Cash flow is the lifeblood of a bootstrapping business. It makes all other business activities possible.

However, obtaining funding for your bootstrapping business proves to be difficult. According to a survey by Guidant Financial, small business owners (most of whom run bootstrapped businesses) cite lack of access to capital as the number one challenge they faced.

Against this backdrop, this article explains bootstrapping as a funding option, detailing its pros and cons. 

• What is bootstrapping?
• Why do bootstrapping businesses need funding?
• Advantages of bootstrapping
• Disadvantages of bootstrapping
• Alternative to bootstrapping: revenue-based financing
• Is bootstrapping a right choice for your business?Alternative to bootstrapping: revenue-based financing

What is bootstrapping?

Bootstrapping is the practice of funding a business from scratch without receiving external investment/funding or with minimal external capital.
‍
In other words, funding comes from yourself or your company, such as owners’ personal savings or operating revenue of the business.

Why do bootstrapping businesses need funding?

Growth is a common reason for bootstrapping businesses to obtain funding. Advertising, new hires and product launches — all these need money.
 
If growth and expansion are items on your company’s roadmap, then funding is something you need to learn about.

Advantages of bootstrapping

• Quick and easy: No lengthy applications or investor pitching involved.
• Low cost of capital: This funding method is interest-free. No fees involved.
• No equity dilution: Bootstrapping does not require you to give up equity or board seats to outsiders.

Disadvantages of bootstrapping

• Relatively slow growth: Compared with raising capital from external investors, bootstrapping provides less funding for your business.
• Increased chance of business failure: For early-stage companies, bootstrapping may not provide sufficient resources to build traction and survive beyond the startup phase.
• Increased risks assumed by owners: Initial funding usually comes from owners’ personal savings. If your online business goes under, you would lose the money invested in the company.

Alternative to bootstrapping: revenue-based financing

‍Revenue-based financing (RBF) is an alternative financing method in which companies receive funding based on future revenue.

In revenue-based financing, RBF platforms provide funding to companies without getting equity in return.

Rather, RBF platforms would share a portion of your company’s revenue until a predetermined amount is paid back. Typically, the predetermined amount is assessed at the capital plus a small flat fee.

Pros of revenue-based financing

• Flexible repayment: No fixed monthly installments. Repayment is based on your company’s monthly revenue. You repay less if you earn less, repay more if you earn more. Total repayment is capped at the predetermined amount.
• Non-dilutive: You do not need to give up ownership or board seats in return for funding.
• Grow at your own pace: RBF platforms do not take part in management of your business, nor will they interfere in your decision-making process. RBF platforms do not need to sell their stakes in your company in order to make money. There is no pressure for liquidity events such as merger, acquisition or IPO. No covenants will be imposed to restrict how you use the funding.
• Easy to apply: Most RBF platforms allow online application. No pitch deck or presentation required. (For example, Choco Up’s online application form only takes a few minutes to complete.) RBF platforms make use of data integration and analytics to assess applicants’ financial performance. There is no need to prepare elaborate financial reports and projections manually. No collateral is needed to ‘secure’ the funding.
• Low cost of capital: The only cost of capital is a small flat fee. No interest is charged on unpaid amounts. No other fees are involved (e.g. loan facility fee).

Cons of revenue-based financing

• Pre-revenue companies may not be eligible: You need to have recurring revenue in order to apply for and repay RBF funding.

In the past, owners of bootstrapped businesses were hesitant to raise funds from investors for fear of shared ownership or borrow money because of the huge financial pressure on repayment. 

By taking away the most unfavourable feature of equity financing, revenue-based financing has found favour with bootstrapped companies in recent years.

Following the ‘grow now, pay later’ approach, these companies get the funding first and enjoy flexibility in repaying RBF funding with a small percentage of their monthly revenue later.
If you want to learn more about accelerating business growth with RBF funding, leave us a message or sign up to get a preliminary offer now!

Is bootstrapping a right choice for your business?

The idea of funding business growth with cash reserves has probably crossed your mind at some point.

Bootstrapping could put pressure on your company’s cash flow, harm liquidity or even inhibit growth.

In addition, owners of bootstrapped companies assume most, if not all of the risks associated with running the online business.

There could be a total loss on investment if your company runs out of cash, or your growth initiative falls short of expectations.

To help you compare bootstrapping and revenue-based financing, Choco Up has compiled the following table:

On the whole, bootstrapping involves multiple pros and cons. There is no definitive guide on which factors matter more than others.

It is for you, the company’s decision-maker, to determine which advantages you find valuable, which disadvantages you wish to avoid, and whether bootstrapping is suitable for your company.

Interested in learning more about raising capital for your company? Check out the following guides we prepared for you:

• E-commerce Funding: A Guide to Your Options
• E-commerce Financing: Options to Finance Your Online Business
• Inventory Financing: Everything You Need To Know