June 2023 | Published by Xero
Bootstrapping (definition)
Bootstrapping means funding a business without getting a formal business loan or investor. It’s the most 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.
The meaning of bootstrapping comes from the common saying ‘to pull yourself up by your bootstraps’ and is intended to convey the idea that an owner is being financially resourceful.
8 types of bootstrapping
Personal savings – raiding the piggy bank.
Unsecured personal loans – depending on your credit score, a bank may lend thousands without requiring any security.
Credit cards – though they have high interest rates, cards can offer 10s of thousands in credit.
Grants – many organizations give away thousands at a time to cause-related or minority-led businesses.
Peer to peer lending – some websites introduce people who need money to private lenders who might just back your idea.
Friends-and-family loans or investment – your personal network may contain people who can help you cover your startup or early operating expenses.
Presales – you may be able to fund your startup by taking deposits for goods or services you promise to deliver at a later date.
Crowdfunding – some websites allow you to pitch their community for startup funding. The funding might take the form of presales, equity (investors) or loans.
Learn more in the guide 14 ways to finance your business.
Why bootstrapping is so popular
Several studies by Xero have found that a majority of small businesses use bootstrap financing. This may be due to the challenges of getting loans, and the resourceful ways businesses can get started for less money.
Challenges of getting a loan
It’s difficult to get startup loans from a bank unless you can offer assets, such as a family home, as security. This is often seen as too risky, prompting many entrepreneurs to build a modest version of their business from a mix of savings and unsecured loans. It may get easier to attract external finance once the business is established and proven to be profitable.
Lower cost business models
Many startups are now also using technology to reduce their startup and operating costs. Ecommerce is a relatively low-cost entry into retail, while service providers are increasingly able to work from home offices and serve clients virtually. The lower startup and operating costs of these models means those business owners are less likely to need a large secured loan.
Risks of bootstrapping
While bootstrapping is often perceived as less risky, there are certainly downsides. Unsecured loans and credit cards often come with higher interest rates, which means debts grow faster. They also create confusion between your personal and business finances. Meanwhile, using personal savings can eat into retirement nest eggs. And friends-and-family loans can introduce financial tensions into personal relationships.
See related terms
Handy resources
Advisor directory
You can search for experts in our advisor directory
Finance your business
Learn 14 ways to finance your business and help turn it into a profit machine
Accounting software
Keep on top of your numbers effortlessly, with the Xero’s online accounting platform
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
