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This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
Getting a business up and running requires capital, but entrepreneurs may have less access to funding or may be more hesitant to take on debt for a new business venture amid the COVID-19 pandemic.
That makes now a wise time to consider bootstrapping a business as much as possible. Small business owners can lay the groundwork for growing their businesses in a sustainable way by focusing on reinvesting profits in the early days of the company. By not taking on funding initially, business owners can hold on to equity and potentially reduce accruing debt.
Challenging conditions
While COVID-19 has made business and economic environments unpredictable it isn’t limiting entrepreneurs and small business owners from launching new ventures. Applications for new U.S. businesses are rising at the fastest rate since 2007.
How entrepreneurs will finance those new businesses however is less certain. Entrepreneurs may have used a combination of measures to fund startup costs like equipment, software or payment solutions and get the business off the ground prior to COVID-19.
Some of the financing measures business owners may have taken include things like taking on equity partners, taking out business or personal loans, or asking for capital from friends and family members.
In today’s uncertain business environment, all of this is more challenging. Investors may be open to taking virtual meetings, for example, but some experts warn that investors could request deal terms and valuations that are less favorable to entrepreneurs than those seen before the pandemic as they are potentially exposing themselves to more risk.
Banks, meanwhile, have tightened business lending standards (with higher interest and collateral requirements) and are charging higher premiums on riskier loans. With many individuals still recovering financially from the job losses of Spring 2020, it’s a sensitive time to be asking friends or family to help you out.
Income-first approach
As a consequence, it may be more feasible for entrepreneurs to bootstrap their businesses at first than to raise funds from outside sources. This might involve finding ways to earn income and prove the viability of the business before taking out a loan or line of credit (or taking on an investor) to finance growth.
One example of this is launching a business in a manner that limits the outlay of capital on startup costs while simultaneously driving revenue. Some ways to start (and scale) over time involve the following efforts:
LOWERING YOUR OWN ENTRY BARRIERS
Consider this: Instead of opening a full brick-and-mortar store, can the business launch exclusively as an e-commerce site, pop-up store, or direct-to-consumer entity?
There are many ways to enter an industry and reach new audiences that don’t involve expensive upfront spending. Holiday fairs, social selling, and virtual events may help a business drive revenue and exposure in the early days of starting up.
SAVING UP
Consider this: Can the business operate as a small project or side hustle until there’s enough funding saved to cover full startup costs?
As the business earns income, the business owner can also supplement it with personal savings and/or any additional funds. Additional funds may include gifts, investments, or borrowed funds from friends and family members (should the owner choose to pursue and/or use them).
LAUNCHING SMALL
Consider this: How can the business keep growing without funding?
Business owners may be eager to grow fast but can fall behind financially if they take on large contracts that require heavy resourcing to execute. Staying small, for the short-term, can limit the need to take on debt. Effective cash flow management can also help ensure the business’ cost of goods track towards profits.
INVESTING IN THE BUSINESS
Consider this: How can sales from customers be applied to fund growth? How can a loan or line of credit help?
As the business begins to take off, entrepreneurs have a greater ability to obtain outside capital. Showing a bank that the business is thriving can help entrepreneurs lock in loan rates that are more favorable, should a loan or line of credit become necessary to improve operations or expand the business.
SCALING WISELY
Consider this: How can the business keep reinvesting?
By continually using income and credit to improve the business, the business can grow in direct relation to profit (with potentially no need for entrepreneurs to take on equity-owning partners). Some ways a small business owner can reinvest profits back into the business include marketing, equipment upgrades, and hiring new personnel for example.
An option for an uncertain era
Bootstrapping can help lay the groundwork for growing thoughtfully and steadily through the uncertain times still ahead. Given that the number of applications for new businesses has been rising, competition for financial resources may remain steep for years to come. Entrepreneurs who aren’t chasing capital can take themselves out of the contest – and by putting less energy into raising equity or debt, they can put more into focusing on their businesses and customers.
