Self-funding, or bootstrapping a startup company, means different things to different people. To the Silicon Valley serial entrepreneur who just sold his company to Google for $100 million, bootstrapping is just writing yourself a big check. To the newer entrepreneur who is lucky enough to have some personal assets, it may mean tapping into savings or a retirement account to come up with $50,000 to $100,000 to get things rolling. To others still – those who represent the vast majority of entrepreneurs – it means living on Ramen noodles and peanut butter sandwiches, calling in favors from friends who will work for free, and squirreling away a few hundred dollars at a time to keep the lights on.
Is it possible to self-fund a company if you don’t already have a fat bank account? Sure, but the amount of capital (or lack of capital) you have will influence the type of business you are in. Fortunately, because of cloud innovations that exist today, you won’t need nearly as much to launch compared with just twenty years ago.
Alternative borrowing: Banks aren’t the only game in town
While some entrepreneurs have a long and steady job history and excellent credit, most do not – the entrepreneurial mindset doesn’t really lend itself to working at the Post Office for 30 years and living around a steady paycheck. As a result, the majority of entrepreneurs don’t have enough savings or assets built up to go the true “back pocket funding” route, and instead look to borrow. A few visits to the bank and most will be quickly disappointed, especially as low interest rates have driven banks and traditional lenders to raise underwriting standards, eliminate smaller loan thresholds and focus more on established businesses. Even if you’re lucky enough to find a bank that is friendly to startups, unless you have an exceedingly high FICO score, you’ll be out of luck no matter how great your idea may be. You may be creating the next Google, but if you don’t have collateral and a high FICO, the bank doesn’t care – and it’s just not profitable for banks to make loans to small businesses any more.
“The new regulatory environment under Dodd-Frank doesn’t make it profitable or easy for banks to make loans to small businesses,” said B.J. Lackland, CEO of Lighter Capital. “Banks will eventually have to make some changes to address this new environment, but they won’t make major shifts until the regulatory doors open.”
Entrepreneurs may have to turn to a new crop of alternatives, the most interesting of which is peer-to-peer lending – an option that is often more expensive than the low-interest bank loans, but still less costly than the usurious payday loan firms. Once you do have some revenue coming in, factoring, or borrowing against receivables, may become an option, and that usually does not require the…