The Wealth Spa

Self-Financing and Bootstrapping to start or grow a business

Posted on 06. Aug, 2007 by Elizabeth Potts Weinstein in Finance

"It takes money to make money" is somewhat true.  Whether you are just starting a new business, growing your business, or adding new products or divisions, you need financing to provide the money (or capital) it takes to realize your vision.  But what type of financing is right for you (and which can you actually get)?  Today’s post discusses the first type of financing — self financing and bootstrapping. 

Self-Financing & Bootstrapping

If your business needs a modest amount of money (that may be a few hundred to tens of thousands of dollars, depending upon who you are), then financing the business yourself is an important option.  Self-financing means that you are funding your business using your savings, from your life savings, the sale of another business, or an inheritence.  Bootstrapping refers to funding your business from the monthly case flow from another source, such as your job, your spouse’s job, passive investments (stocks, real estate), or other small businesses. 

Both types of self-financing have three big pro’s:

1. You don’t give up ownership in the business (and don’t give up future profits).
2. You don’t have to create a fancy business plan or fill out an application.
3. You don’t have to pay interest.

But there are three big con’s:

1. You are taking on all the risk.  If your business declares bankruptcy, you will probably loose all of your investment (unless you structure it differently, which can be done).
2. You have a limited source of funds.
3. An unprofitable business or product can hide behind the rest of the business, without careful evalution. 

When does self-financing or bootstrapping work?  When you are able to absorb additional risk (without getting divorced), have enough funds to fully fund a project, and the funds required are relatively modest.  You may also use this method as a first level of funding, before you are ready to go to a bank or investors (sometimes it also helps build trust in the business if the founded has invested him/herself). 

I will be covering debt financing and equity financing in future posts.   Meanwhile, feel free to leave your questions or feedback in a comment below! 

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Tags: Finance & Debt