Bootstrapping vs borrowing: Which is better?
The pros and cons of self-financing versus seeking a loan or investment.
Steve Jobs and Steve Wozniak did it when they launched Apple. So too did eBay founder Pierre Omidyar, and NastyGal’s Sophia Amoruso.
What do these founders have in common? They all bootstrapped their businesses when they launched, which means they used their own money to launch, and didn’t have outside investment.
Deciding whether to bootstrap or borrow funds to launch or scale your business is a choice that every entrepreneur must make at some point, and there are pros and cons to both.
Wrinkles Schminkles founder Gabrielle Requena understands these nuances better than most. She bootstrapped her business at the beginning – but considered taking on investment at one point.
Requena launched Wrinkles Schminkles, which produces anti-aging wrinkle treatments, including medical-grade silicone patches, in 2014 while running her own consulting company.
Initially, Requena bootstrapped Wrinkles Schminkles by putting $50,000 of her own savings into its setup. “I was lucky to be in a position where I was earning enough money from my day job to be able to invest in [Wrinkles Schminkles] as a side business,” she says, explaining that the initial lump sum covered creating prototypes and building a website.
“I was lucky to be earning enough money from my day job to able to invest in my own business."
Within a few years the business had taken off and become her full-time job.
However, in 2018, Requena began considering venture capitalism as a way to grow the company and access new markets. So, she applied to appear on reality TV show Shark Tank, where judges evaluate start-up businesses and offer funding in return for equity to successful contestants. “It was an excellent experience, but very, very scary,” she says with a laugh.
Although a Shark Tank judge did suggest investing in Wrinkles Schminkles, Requena ultimately declined. “It wasn’t at the equity I was offering – it was a lot more,” says Requena, who today still owns her multimillion-dollar business outright.
While bootstrapping her business was the right approach for Requena, there’s no one-size-fits all approach to financing a venture.
The right option, says commercial finance specialist Sarah Eifermann, will depend on a number of factors including cost of sales, scalability, the nature of your operations, and, of course, your financial situation.
To help make your decision, we’ve broken down the pros and cons of each method, with secrets and success stories from business owners and experts.
Bootstrapping
For many business owners, bootstrapping (which comes from the phrase “pulling yourself up by the bootstraps”) may be the only option.
Bootstrapped businesses tend to be very lean; they might be run out of the founder’s home, and rely upon personal savings to fund the initial setup. (Steve Jobs famously sold his car to fund the launch of Apple.) Hiring staff may not be an option, financially, and it’s common for bootstrapped businesses to utilize freelancers and contractors rather than take on the expense and responsibility of employees.
THE PROS
Total control
Self-financing your business means retaining total control. All decisions are yours alone, and there are no obligations to other people, whether that’s investors or banks.
“There is a noise that is created when you’re answering to other people’s opinions and interests versus just keeping yourself focused and in your own lane,” observes Requena.
No repayments
Not having to borrow money means not having to make repayments, and for Eifermann, the benefits of this can’t be understated. “There’s no debt, no repayments for debt and less debt stress,” she says.
Faster start-up speed
Depending on the size of the business, bootstrapping may also allow you to get up and running more quickly. “Bootstrapping is often a faster and sometimes less stressful way to purchase assets for your business,” says Sam Roby, founder of Pure Capital, explaining that seeking investment or approval on loans can take weeks or months. If you need to purchase equipment or launch quickly, bootstrapping may be simpler.
“Bootstrapping is a faster and less stressful way to purchase assets for your business.”
THE CONS
Slower growth
Reinvesting profits into the business is a sustainable, if sometimes slow, way to grow. Sometimes an injection of cash can help make a crucial hire, purchase a piece of equipment that will allow you to scale or enter a new country or market.
Difficulty competing
If your industry is highly competitive, scaling quickly may be necessary to compete. In new or innovative industries, being first to market (known as achieving first-mover advantage) can be critical for success. In these situations, a business loan may be the only way to stay ahead of the competition.
Case study
“Accept that bootstrapping will impact your style of living”
U.K.-based gift retailer Sunday’s Daughter launched in 2012 with founder Rachael Howard and her husband at the helm.
Today the business has eight employees, but at first, the pair self-financed using their savings and reinvested any money they made from sales back into buying more materials. It was a period that Howard remembers as “very stressful.”
“We lived from paycheck to paycheck,” she says. “If you self-finance a business, then accept it will impact your style of living,”
“If you self-finance a business, then accept it will impact your style of living."
On the positive side, Howard says, “I learned so much during that [early] period; the importance of counting all the pennies and looking for better deals all the time. It definitely made me more cautious of overstretching and aware of our cash flow.”
“I think being able to secure a loan would have made it easier to develop the business more quickly.”
Borrowing
There are countless ways to secure financing for small businesses – whether that’s launching a start-up or taking on debt or equity to grow or scale – and this approach works best for entrepreneurs who believe they have a great business idea but don’t have the finances to fund it.
Business owners who do take out a loan must have confidence in their business plan and their ability to pay the money back.
THE PROS
Speed
Taking out a loan can be a great way for businesses to scale quickly, says Roby. “You can also work with your lender to structure the loan in a way that will be the most beneficial for you, which may include some combination of a deposit and residual payment.”
Access experience
Working with a bank or lender or securing investor funding may offer access to that lender or investor’s experience. Requena describes this as “smart money… money that’s also backed by the smarts to open doors and offer insights into different areas of the business where you’re out of your depth."
THE CONS
Financial liability
A loan may facilitate faster growth for your business, but it comes with a bigger price tag and higher risk.
“Financing with a loan can cost a lot of money and break your business if managed incorrectly,” Eifermann warns. Like bootstrapping, you can’t sustain it without making a profit.
“Financing with a loan can cost a lot of money and break your business if managed incorrectly."
Stress
Committing to a loan can put a great deal of pressure on your business and create stress if your actual sales don’t align with your forecast. The application process itself can also be time-consuming and costly, and not all businesses are eligible to receive a loan.
Says Roby, “The biggest con of taking out a loan is paying interest, and also a potentially slower turnaround time [for financial contracts].”
Case study
"They make sure you have everything in order to be able to start strong."
Independent sustainable women’s clothing brand Sisterhood – a U.K.-based label that now ships around the world – was created by Eve Jones, who took out a business loan to launch it.
“[Our bank] helped with a business plan and [they] make sure you have everything in order to be able to start strong. They review the plan… It was really manageable, making the finances a lot less stressful.”
When Jones started the business, she was 25 and still living at home. No rent and minimum financial responsibility helped make her loan experience largely stress-free.
“I set up working from my mom’s kitchen table, using our garage as my ‘warehouse’ for the first year to save on office rent. After the first year of working unpaid, I was then able to pay myself a proper salary from the business to move into my own apartment. Having a loan was a real ‘pro’ as I didn’t feel under pressure with the repayments being so low.”
3 tips for taking out a business loan
- Plan, plan, plan
“Get yourself a good accountant from the beginning to make sure you start off on the right foot, whether being a sole proprietor or limited company,” says Jones. “There can be a lot of unexpected costs when setting up, so really take time to think about all the fine details of what’s involved and what may crop up.”
- Take your time
When it comes to making significant financial commitments, Roby says it’s important not to rush. “The fastest option is not necessarily the best. Sometimes businesses need to be worked with in order to be in a financeable position, and this can take up to six months of properly structuring the books and bank statements to make sure they’re appropriate.”
- Be frugal
“Try to make cuts on your general expenditure for at least the first year,” advises Jones. It’s also important to work out what a business can truly afford as a repayment every month. Says Roby, “The last thing a business needs is to be overextended for a luxury item or something that may not be income-generating.”
All references to any registered trademarks are the property of their respective owners. Afterpay does not endorse or recommend any one particular supplier and the information provided is for educational purposes only.
Categories