Business Owners Toolbox Blog Discussions and articles to help the small business owner solve the challenges they face as they grow their business.

August 8, 2011

Downsides of Bootstrap Financing

Filed under: Entrepreneurship — Tags: , , , — Mike Van Horn @ 10:57 am

Bootstrap financing means to fund your business launch or growth without outside capital, relying on internal savings or cash flow generated by operations. This severely limits their rate of growth.

Some entrepreneurs bootstrap out of necessity: they have access to no capital. But many rely on internal resources even when they could obtain capital. I see two main reasons:

• Fear of debt, perhaps out of prior bad experience. They don’t trust their own resolve to repay debt so that it doesn’t just pile up.

• Lack of trust in their own business model and acumen. They’re just not convinced they can make their business succeed so that it is a good investment.

Owners achieve a major leap in business maturity when they overcome these fears and become willing to invest in their own company—via loans or equity investors.

Many small companies that self-finance their launch or growth are chronically under-capitalized. They are always running on empty. This can lead to some very bad habits in the way you run your business.

• You take any work that comes along because you are so cash starved. Thus you take unprofitable work that can actually put you deeper in the hole.

• You’re more worried about revenue than about making a profit.

• You work all the time. If you bill by the hour, anything that is not billable is suspect, such as planning, marketing, developing strategic relationships. When you make commitments to yourself, to develop new products or service for example, you are always willing to break these commitments to take paying client work. You always bump your commitments to yourself—or your family.

• You operate as the “lone ranger.” You are reluctant to get outside advice and expertise because of the time and money it requires.

• You wear all the hats. You do everything yourself. You are reluctant to spend on outside services, even if it would allow you to use your own time more effectively.

• Thus, you use your time poorly.

No plan. No strategy. Just work. This is the route to burnout or bankruptcy. And staying tiny.

“Alternatives to bootstrap financing” are described in my next post.

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