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
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Advantages |
Explanation |
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Quick and easy |
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Low cost of capital |
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No equity dilution |
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Disadvantages of bootstrapping
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Disadvantages |
Explanation |
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Relatively slow growth |
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Increased chance of business failure |
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Increased risks assumed by owners |
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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 and cons of revenue-based financing
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Advantages |
Explanation |
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Flexible repayment |
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Non-dilutive |
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Grow at your own pace |
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Easy to apply |
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Low cost of capital |
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Disadvantages |
Explanation |
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Pre-revenue companies may not be eligible |
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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:
|
Bootstrapping |
Revenue- |
|
|
Application process |
None |
Simple |
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Access to growth capital |
No |
Yes |
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Business growth |
Slower |
Faster |
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Risks assumed by owners |
Higher |
Lower |
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Repayment |
None |
Yes (small % of monthly revenue) |
|
Cost of capital |
Low |
Low |
|
Equity dilution |
No |
No |
|
Loss of control |
No |
No |
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
About Choco Up
Founded in 2018, Choco Up is the leading revenue-based financing platform in Asia Pacific, offering non-dilutive growth capital to fast-growing companies.
Currently covering more than 10 markets and 10 sectors, Choco Up has helped hundreds of businesses capture growth while protecting equity upside.
To learn more about what we do, check out our client success stories or apply for fundingnow!
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