What you should know about bootstrap financing for your small business

Many small business owners turn to bootstrap financing in order to get their new business up and running. Because of a lack of business credit history many small business use “bootstrap” financing in order to get the money they need to start and keep their business running. This is often the most viable option for a small business owner who has tried to get financing from traditional sources and failed.

Bootstrap financing is defined as the method that many small business owners use when they need to use their own resources to start their business thereby “pulling up their own bootstraps”. While this may not work for everyone it is important to keep in mind that there are a number of different ways you can do this. Many small business owners also like this type of financing since it leaves them less dependant on lenders while they work on growing their business. Here is what you should know about bootstrap financing for your small business-
• Start with your own savings-Many small business owners have had the dream of starting their own business for a long time. In order to finance this dream they have begun putting money away. If you are lucky enough to be in this category then your own savings may be a great way to get your business financed. However, you should keep in mind that small businesses have an extremely high fail rate. You could end up losing everything you invest in your new business. You need to make sure that you are not investing money that you can’t afford to lose. In addition, it is important to understand that new small businesses are often not profitable for even a year. This means you will need to money to live on while you are building your business.
• Ask family and friends-Many times, family and friends are eager to invest in a new business. This can be a viable source of financing for your new business. However, you should make sure that you are clear with your family and friends whether the money you are asking for is a loan or an investment. Keep in mind that you will be obligated to repay a loan even if your small business fails but an investment is the risk that your family member or friend will take on. You want to make sure that you don’t jeopardize any personal relationships and you should take all legal steps that are necessary before accepting any bootstrap financing from family or friends.
• Use a credit card-Another type of bootstrap financing that has become common is the use of business credit cards. However, this is really just a type of debt financing that can carry a very high interest rate. Small business owners need to be very careful about how much debt financing they take on since this can burden your business right from the start. This is especially true of credit card debt where a late payment can mean an interest rate that has tripled. Small business finance experts also stress that you should never use your personal credit cards to finance your small business. The reason for this is simple even if your small business fails and you declare business bankruptcy you will most likely still be liable for any business charges on your personal credit cards. This can also be a serious blow to your personal credit rating. The bottom line is that if you choose this type of bootstrap financing for your small business you should use as little as possible and pay it off quickly.