Small Businesses Beware: The Bad Side of Bootstrapping

Cash flow and profitsWithin the past decade, the amount of entrepreneurs that are starting-up small businesses by bootstrapping (the practice of starting a company with one’s own capital) has taken a dramatic growth. According to the Wall Street Journal, more than 25% of small businesses and firms had no reliance on outside funding, a 16% increase from July 2009.

In the struggling economy that plagued the United States in recently years, financing small businesses with personal capital was somewhat efficient. Self-funding attracts many startups because it grants the owner complete control over business decisions, allows small companies to be as customer-friendly as possible, and motivates organizations to allocate their resources shrewdly- nobody wants to waste money if it is coming from their own personal savings, after all. The practice has worked well for many small enterprises, and a few- such as ZipRecruiter- have been able to turn their startup into multi-million-dollar companies.

Although, as the growing economy gets a full head of steam, the bootstrap movement may not provide best path for a small business owner to follow.

An expanding market provides an opportunity, and quite often, a mandate, for an expanded business. Yet, many small, bootstrapped companies that are looking to grow with the economy are finding it difficult to get ahold of the capital necessary for development.

The Wall Street Journal reports that in a Mainsail Partners survey of 460 founders of bootstrapping startups, 42% said that the biggest obstacle that stands between them and expansion is a lack of capital.

As it turns out, opting to fund your own startup and avoiding the traditional route of looking for outside loans can provide a major stumbling block when it comes to small business development. While it can be risky, taking on loans can prove to be incredibly beneficial for a small business, as it establishes relationships with investors, and introduces entrepreneurs to a vast network of potential funders as their company grows.

 The world of investment is known to be rather cliquey, so putting your foot in the door early is not a bad decision. While bootstrapping seems great at the onset, it is important to think about your long term goals for your small business. Seeking investors for your startup could help get your name out there, which will come in handy when you are looking to take that next step in expansion.