What is bootstrapping and how does it work?

What is bootstrapping?

Bootstrapping means funding a business without getting a formal business loan or investor. It’s a common way to finance a startup.

It can be tricky for first-time business owners to get business loans or attract investors in their startup phase. They instead scrape together the money from savings or small unsecured personal loans.

Where does ‘bootstrapping’ come from?

Originally the bootstrapping meaning comes from the phrase ‘to pull yourself up by your bootstraps’, referring to the idea of taking personal responsibility for something.

Although there are other ways to fund your startup, like through external investors (like venture capitalists and angel investors) and traditional business loans, self-financing and bootstrapping techniques are still popular with entrepreneurs who want to keep control over their company and grow their business organically.

What are some bootstrapping examples?

All kinds of businesses have humble beginnings. Mark Zuckerberg, who created Facebook (now Meta) from his college dorm room, and Jeff Bezos, who started Amazon from his garage, are two famous bootstrapping business examples.

To create a self-financed, lean startup you’ll need to find creative ways to make the most of the skills, funding methods and tools you have. That means using bootstrapping techniques that match your type of business startup.

For instance, if you’re a tech business you might use personal savings to cover initial startup costs like software licences, or you might have programming skills you can rely on. If you're starting a manufacturing business, like a t-shirt company, you could start a presales programme where people buy your t-shirts before you’ve made them, and use the presale income to cover your production costs.

Eight bootstrapping strategies for your business

1. Personal savings – raiding the piggy bank.
2. Unsecured personal loans – depending on your credit score, a bank may lend thousands without requiring any security.
3. Credit cards – although they have high interest rates, cards can offer 10s of thousands of dollars in credit.
4. Grants – many organisations give away thousands at a time to cause-related or minority-led businesses.
5. Peer- to- peer lending – some websites introduce people who need money to private lenders who might just back their your idea.
6. Friends-and-family loans or investments – you might have people in your personal network may contain people who can help you cover your startup or early operating expenses.
7. Presales – you may be able to fund your startup by taking deposits for goods or services you promise to deliver at a later date.
8. Crowdfunding – some websites allow you to pitch to their community for startup funding. The funding might take the form of presales, equity (investors), or loans.

Learn more in our guide 14 ways to finance your business.

Why bootstrapping is popular with entrepreneurs

Many entrepreneurs start bootstrapped companies as a practical alternative to traditional loans. By investing their own savings and exploiting technology and lean business models, they can avoid hefty business debts and outside influence on their plans. They can also launch their startup sooner as they don’t have to delay until they’ve found external funding.

The challenge of self-financing a business and running it on tight finances can encourage entrepreneurs to find creative ways to reduce expenditure, like carrying out deliveries themselves instead of outsourcing, and develop a lean business model that helps their finances go further as the business grows.

Entrepreneur bootstrapping remains a go-to strategy for many when starting a business.

The challenges of bootstrapping

Although bootstrapping your business increases your freedom, the challenges of self-funding can create other difficulties and increase your personal risk.

The chief problem is in overcoming limited capital resources. It’s difficult to get startup loans as a bootstrapping entrepreneur unless you can guarantee the loan with other assets, such as your family home.

Funding your business through personal investment can limit your small business financing, making it tricky to deal with any unexpected challenges. Less funding also means you can’t invest as much as you might’ve with outside investment, which could slow your business’s growth and make it harder to scale.

And if you’ve taken a personal loan to provide startup funding, it’ll be your savings on the line if you don’t reach your projected profits. This increases pressure on you, rather than on the business in general.

Are there other ways to finance a startup?

Because of the financial risks involved in getting a startup going, many entrepreneurs build a modest version of their business from a mix of savings and unsecured loans.

There may be other ways to finance your startup, such as through grants and financial support from your local government and nonprofit organisations.

In New Zealand, find help for new businesses.

Of course, it’s often easier to attract external finance once your business is established. After initially bootstrapping your business, you could factor into your business growth strategy to seek extra funding once you’re up and running.

Bootstrapping tips

Remember that bootstrapping isn’t (usually) forever – it’s just a self-sufficient way to get your business off the ground. In this startup phase, focus on doing a few things well to help you grow your business until your finances improve:

Manage your finances with precision: To make your resources go further, keep a tight rein on your finances through strong cash flow management and smart spending.

Build a network and find a mentor: Find your business tribe and learn from them, to help you to overcome common business pitfalls. A mentor is great, too, for help with bootstrapping startup tips and guidance. And you never know, your network might provide useful partnerships that could help your business to grow in the future.

Stay adaptable: Running a bootstrapped business, you have to roll with the changes. Your resources are few but so are your financial obligations, so if you can be flexible and nimble to navigate any challenges, you’ll give your business its best chance of lasting the distance.

Streamline your business finances with Xero

Meticulous financial management is crucial for bootstrapping entrepreneurs with limited financial resources. A positive cash flow can be the difference between the success of your startup and a struggle to get it off the ground.

Xero accounting software takes the stress out of managing your small business finances. Xero’s real-time insights into your bootstrapped business, easy-to-use features, and automated processes reduce your admin and make it easier to give your bootstrapped business the oversight and financial discipline it needs to launch and grow..