The following is a guest post by Ed “Skip” McLaughlin and Wyn Lydecker, the authors of “The Purpose Is Profit: The Truth about Starting and Building Your Own Business“. If you’d like to find out more about guest posting on Money Q&A, please read our Guest Posting Guidelines.
Every business needs capital to start, operate, and grow. Every type of capital has a cost, with advantages and disadvantages to consider. And to some degree, every source of capital will affect the amount of control you will maintain over your business.
When I was starting my company, USI, I couldn’t wait to lift off. I was ready to quit my job and felt impatient to get started. I considered sourcing money from friends and family but could not rationalize the risk of damaging personal relationships or losing control of my business.
So, I pursued debt financing from commercial banks and the SBA, only to get ensnared in the red tape of institutional decision-making. In the end analysis, I realized that bootstrapping was the only pathway that would enable me to maintain full control of my business.
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Should You Bootstrap?
Deciding to bootstrap is a big step. There are real trade-offs and opportunity costs to consider:
- Do you have the personal resources to invest in your business without betting the ranch?
- Are you comfortable putting your own money at risk to fund a brand new enterprise with an unknown outcome?
- Can you accept the fact that the money you invest in your business will no longer be available for personal contingencies such as buying a car, buying a home, funding education, dealing with unplanned medical expenses, or saving for retirement?
- What if the business fails? Can you withstand such an outcome?
If you decide to bootstrap, you can secure capital to fund your startup from the following personal sources:
- Personal savings
- The cash value of a whole life insurance policy
- A home equity loan
- A personal loan
- Credit cards—but only as a last resort
When I resolved to self-fund my startup, I knew that I would use only savings as my source of capital and would forego a salary for the first year. I also planned to reinvest all of the profits into future growth.
Because my wife, Barbara, and I had been saving up to purchase a house, we had built up a substantial nest egg. After months of debating the startup and funding decision, we finally agreed to make the sacrifice and shift our priorities from buying a house to investing our savings in the business. If you have the financial wherewithal, I feel strongly that using your own money to fund your new business is the best path to take.
Minimize Risk through Personal Sacrifice
To minimize the risks of bootstrapping, Barbara and I came to the conclusion that we needed to downsize the cost of our personal life. With no salary coming in, and our savings flowing out, we had to figure out how much money our family needed to survive.
To build in a significant margin for safety, we planned to cut our family’s expenses in half. After careful calculations, we realized that if we moved from our four-bedroom house to a two-bedroom cottage, we could cut our rent and occupancy expense by 60%. Barbara and I also agreed to eliminate all luxuries and minimize the cost of essentials. After making these reductions, we were confident we could survive for almost three years living just off our savings.
Barbara gave the plan her full support and agreed to manage USI’s finances without compensation. She knew me well and had faith in my ability to start the business and succeed. Even though I was giving up the perks of a partner’s income and benefits, Barbara understood that I would never be truly happy until I left the corporate fold and started my own business.
Her support was particularly meaningful because she was familiar with the road ahead. Barbara had grown up in a farming community along the Mississippi Delta. Her parents ran a truck stop in Arkansas, where she had learned all about long days, hard work, and sacrifice—all vital ingredients of a successful business.
3 Questions to Ask
Whether you are single, in a relationship, or married, you need to determine together how much of your savings you will consume to survive during the startup phase by asking the following questions:
- What is the bare minimum you need to live on during the first three years?
- What can you do without?
- Will your spouse, partner, or significant be willing to take the risk with you, make the sacrifice, and support your efforts to succeed?
When you use your own money, fear of failure becomes your greatest motivator. I was desperate for success, and I was going to do everything I could to ensure that my business would prosper.
Bootstrapping Is Best
Once I made the decision to bootstrap, I never looked back. I did not have to struggle with the monthly cash drain of repaying a loan. I didn’t have to worry about losing my relatives’ or friends’ money. But most importantly, I did not have equity investors looking over my shoulder, second-guessing my business decisions.
I had complete control over who I hired and where and how I operated. Having control over business strategy and decision-making increased productivity, streamlined operations, and maximized my personal satisfaction. In the long run, bootstrapping enabled USI to enjoy rapid growth, as we kept plowing the profits back into the business.
If you are willing to take the risk, bootstrapping can be a powerful way to fund your startup and maintain control. It can be well worth the effort and the sacrifice.
Excerpted in part with permission from “The Purpose Is Profit: The Truth about Starting and Building Your Own Business“ by Ed McLaughlin, Wyn Lydecker, and Paul McLaughlin.
Ed “Skip” McLaughlin
Ed is the founder of four businesses and is currently running Blue Sunsets LLC, a real estate and angel investment firm based in Darien, CT. He bootstrapped his first business, United Systems Integrators (USI) Corporation, a corporate real estate outsourcing firm, and grew it into an Inc. 500 company.
Wyn is the founder of Upstart Business Planning, where she works with entrepreneurs to develop plans that answer the questions investors ask most often. Previously, she was Managing Director of Business Plans International in New York and Co-Director of the Small Business Resource Center at Norwalk Community College.