According to the Federal Reserve’s Small Business Lending Survey from September of 2019, lending related to small commercial and industrial businesses has decreased considerably.
As per the data, there seems to be a 10.5% decline in the volume of loans that were taken out during the second quarter of this year and the second quarter of 2018.
Whilst such data is certainly encouraging, the average line of credit that small business owners from the U.S. still exceeds $630,000. To sidestep such a tremendous debt, a lot of entrepreneurs are deciding to bootstrap their businesses.
They do so to eliminate the liability that they must expose themselves to while maintaining the entirety of the ownership. In reality, however, those who bootstrap their businesses are going to run into a plethora of challenges.
So, the following 10 items are some of the most important things that you should know before ever choosing to take this route with your start-up.
1. Bootstrapping Your Start-Up Is Not Glamorous
The underlying concept behind bootstrapping a venture revolves around self-financing the entirety of the start-up expenses. Afterward, any expansion that takes place will consume profits that the business generates.
Thus, there are no external sources of capital such as loans or money provided by equity investors. This is why the first thing that you should know is that bootstrapping is by no means a “glamorous” way to jump-start a business.
If you intend on leaving your day job because you are working long hours and not earning enough, starting a new project with your capital will not necessarily resolve these issues.
Instead, you will only amplify the number of hours and financial struggles that you undergo as the bootstrapping ensues.
Of course, this will not be a permanent outcome as the growth of your business will get you much closer to financial freedom, but you should plan to spend a few years working an extremely difficult schedule while scaling back on all spendings.
2. Quitting Your Day Job at the Right Time Is Crucial
Since your ability to cash flow overhead expenses of the start-up is essential to its longevity, the moment when you decide to quit your day job represents a turning point in your professional career.
Although it’s extremely difficult to bootstrap a business while still working somewhere else, doing so for merely a few months could help ease the transition.
So, you should focus on building a timeline that will allow you to quit your day job relatively quickly after starting the new venture.
The main caveat to this, however, is that you must have enough in your savings to support yourself until your new enterprise takes off.
3. Finding Product Market Fit Is Harder Than You Think
One of the most commonly overlooked areas of start-up planning relates to proper market positioning. While you must have a good product or service, failing to find the right market for it will completely undermine the effort.
To understand why—consider the way that Phil Barden explains the concept of rational versus emotional decision making in his critically acclaimed book “Decoded.”
Namely, those who are rational and operate on the so-called pilot make purchases based on solving a need cost-effectively. Individuals who make emotional transactions, which means that they operate on autopilot, only purchase things if they perceive a certain brand as a reliable solution.
To them, the cost- or quality-based analysis takes a backseat to implicit trust that they have in the product.
So, since your bootstrapped venture will be brand new to the market, there is a good chance that many consumers will stay away at first, regardless of how forward-thinking or outstanding your goods or services are.
For instance, though some companies may offer cheap phones that have all the features of an iPhone, most people will still purchase devices made by Apple due to their implicit trust.
Hence, why you must find a way to present yourself to the audience that will rationally decide to give you a chance.
4. Prioritizing Spending Is Mandatory
According to Forbes Magazine, marketing your product is more important than that product. Albeit a slight exaggeration, the notion that marketing is as relevant as your product development is completely true.
After all, people will never choose anything that you are offering if they are unaware of it. In cases of bootstrapped start-ups, knowing things like these will help you properly prioritize spending.
For example, since dedicating a certain portion of your funds to advertising is unavoidable, you should offset this need by make strategies to spend as little as possible.
In translation, instead of outsourcing your marketing needs to a third-party provider, it may be time to learn how interest-based targeting, search engine optimization, and social media promotions work.
Remember those long hours that were mentioned earlier? These are the types of tasks that lead to them.
5. Reliable Providers Are in Short Supply
Although you may know how hard it is to find reliable suppliers, bootstrapping a company will show you the true extent of this problem.
Nearly all small businesses face similar troubles as they possess limited capital and have to focus on a very low number of procurement providers or employees.
So, when one of their supply chain partners proves to be unreliable, they face a high risk of losing revenues due to delays. Walmart, for instance, can easily sidestep this concern because, according to Forbes, it has north of 100,000 suppliers.
Your business, on the other hand, has nowhere near that type of a safety margin.
Here at Taxhub, one of our main issues is hiring capable CPAs during the tax season as they are extremely costly and it is hard to determine how effective they are beforehand.
Companies that work with products face the same issue as their suppliers can increase prices or cut them off at any point. One way that you might be able to prevent such a problem would be to negotiate long-term contracts.
6. Scalability May Be an Issue
If you reach a point where you need to scale your business to reach another market, bootstrapping will make it extremely hard to do so quickly. The reason why is that you cannot take advantage of external investors to finance your expansion.
Instead, nearly all of your cash must come from the sales that the company makes.
Since only about half of small businesses make it to their fifth anniversary, according to the Small Business Administration Office of Advocacy, the odds of turning a profit hefty enough to scale fast are virtually non-existent.
That means that growth will have to wait until your venture can reliably facilitate positive returns each month.
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7. Lack of Investors Reduces Your Network
Even though accessibility to cash is the primary one, having equity investors comes with many other benefits.
One of them is their ability to help with networking and put your company in a position to negotiate favorable contracts or reach distant markets.
This is why, for example, many small businesses that participate in the popular TV Show “The Shark Tank” do so for the chance to partner up with an experienced investor, not just to get a boost in cash.
As you bootstrap, regardless of whether you have partners or work by your lonesome, you will have to dedicate a lot of effort into building a network from a very low starting point.
8. Asking for Approval Will Seldom Be on Your Mind
Since there seem to be quite a few downsides to the idea, one may wonder why bootstrapping is even a thing. Well, in reality, most of the negative sides can be avoided with some fairly simple, though detailed, planning.
The advantages, however, are just as mention-worthy. What sole proprietors love the most is the fact that bootstrapping allows them to forget how to ask for approval.
Given that they own the venture and have no debtors or investors who can influence their actions, they enjoy full and undisputed autonomy.
9. There Is an Unparalleled Sense of Accomplishment Waiting For You
Additionally, you should keep in mind that, while it will be remarkably difficult, building a successful company from scratch is going to bring an unparalleled sense of accomplishment.
Defeating the odds and finding a way to prevail in an economy where more small businesses shut down than make it to year five is an impressive feat.
The fact that you get to thrive without external help only gives the achievement even more power and multiplies your fulfillment.
10. Some of the Largest Ventures Did It
Finally, you should always recall that many people came before you and successfully bootstrapped some of the greatest companies to ever exist.
Technology-based giants like Apple, HP, Dell, and Microsoft would all be the epitome of overcoming adversity as they all began in someone’s basement or a garage. Now, they bring in billions of dollars per year.
To be fair, each of those operators bootstrapped a long time ago when accessibility to lending was a lot worse than it is today.
Nonetheless, if they could climb to such mind-boggling success and remain just as dominant many decades later, your chances will only be non-existent if your ambition falls behind.