How to Fund Your Bootstrapped Business
Bootstrapping any business is hard. Bootstrapping a physical product business is really hard.
Today, money is cheap. You can get favorable interest rates from banks... if you have two years of profit to show. If you're making money, you can get more. The hard part is making first dollars.
A friend recently asked about how to fund a business idea. I didn't have any easy answers.
We took money from anywhere we could get it when starting Tortuga. Our only rule was not to give away equity. No venture capital. This wasn't much of a constraint since no VC would have given us money then anyway.
We were able to fund two years of product development with the sources I'll describe in this article. Even with our own savings and a loan, we nearly ran out of money. The product (Tortuga V1) wasn't ready, but we had to go into production while we still had money to pay for production.
V1 wasn't what it could have been. We spent over two years selling through 100 bags. Competitors saw an idea they could copy and took advantage of new sources of funding, like Kickstarter, to launch and compete with us. By then, we had redesigned the bag into Tortuga V2 and, with the help of two loans, re-launched the product and business. V2 thrived and last year we launched another product line, the Outbreaker Collection, using yet a third source of funding. This time we qualified for more traditional funding from a bank.
In this post, I'll outline options for funding your idea (before you've proven you can sell it) and getting access to growth capital for a profitable v-commerce business. If you want to launch a VC-funded startup and exchange ownership for cash, you can find plenty of advice elsewhere online. This one is for the bootstrappers.
No Experience Required
Using your own savings to fund an idea is obvious but worth including here. If you want to retain 100% ownership, pay for it your own damn self. Having skin in the game is good.
While you may not have enough money saved up to pay for everything, having the discipline to save money and manage your business as if you're spending your own money (even from the early days) is a useful learning tool. Contrast that with tech founders' wasteful spending of other people's money. Learning financial discipline is good. Having no downside is bad.
Here's where it gets fun. This isn't an exhaustive list, just some inspiration based on how we paid for production runs of Tortuga V1 and V2. Note that V1 sold so slowly that, despite nearly non-existent overhead, we never built up a cash balance to put toward V2. Thus, we had to totally recapitalize (put money back into) the business.
Our most important funding source was the Jewish Free Loan Association. Everyone laughs when I tell them this. For some reason, the JFLA gives out interest-free loans of up to $15,000, even to Gentiles. We took out a JFLA loan for V1 and re-upped it for V2. I don't know how we would have funded Tortuga without those loans.
For V2, we supplemented the JFLA money with an $8k loan from Lending Club. They now have business loan options, but, at the time, I took out a "personal loan for business purposes." That means that I was on the hook, personally, for the loan. Jeremy and I were both on the hook for the JFLA loan.
Since prospective entrepreneurs can't get money from a bank without two years of profitability, Kickstarter and Indiegogo have become rights of passage.
We launched before either platform was well known and have never run a crowdfunding campaign.
You can find plenty of advice on how to do so from people with much more experience than me. The important thing to say here is that these platforms are now quite competitive. You can't just post your campaign and expect it to be fully funded. The best campaigns now have professionally-produced videos, well-written copy, and graphics outlining all of the rewards. You aren't competing just with other solo founders and small teams. You're competing, in some cases, with VC-backed companies running their second or third campaign. This may seem unfair, but it's the current state of crowdfunding. You should know the challenges of crowdfunding before launching your campaign or planning to rely on it for funding.
In this section, I'll outline funding options for businesses that are further along in their development. The rule of thumb is two years of profitability. Once you hit that mark, you'll have more options.
Line of Credit
We opened our first line of credit in 2016 after researching and vetting a range of banks.
A line of credit works like a credit card with a high limit. You can draw down your line of credit by turning it into cash in your account that you can spend. Then you re-pay it at a set interest rate. You are only charged interest on the outstanding amount of the line (how much you owe).
Let's say you have a $100,000 line of credit. You draw down $50,000 for a production order. You will only be charged interest on that $50,000. Next month, you pay down $10,000 of the principle. Now, you will be charged interested on the remaining $40,000 outstanding.
You can also draw down the remaining $60,000 ($100,000 - $40,000 outstanding) as needed.
Lines of credit (LOC) are ideal for physical product businesses because they can be used to fund a production order. Then, as the product sells, you can pay back the money. An LOC helps with cashflow. You use the LOC to pay for inventory rather than your current savings.
As mentioned up top, money is cheap right now. We got our line of credit with an interest rate of prime + 0%. "Prime" is the current prime interest rate.
If you qualify, you should get a line of credit. You aren't charged any interest unless you use it. A LOC is a useful tool to have at your disposal when needed.
One bank that we vetted suggested a Small Business Administration (SBA) loan over a line of credit. This wasn't the right choice for us then but is another useful tool. SBA loans are typically for larger amounts with longer payback periods. We were approved for a seven-year loan.
An SBA loan is better for making a large investment like a piece of equipment or a warehouse. An LOC is better for recurring inventory purchases.
Like other financing options, an SBA loan is a tool that should be used for the right job if you're to maximize its usefulness.
Merchant advances went from novel to ubiquitous in the last few years. Advances are offered by commerce platforms and payment processors. They provide you money up front and automatically take repayments out of your future sales. Since your sales are going through their platforms, these companies can easily determine how much money they're willing to give to you.
The advantage of merchant advances is that they are quick and simple. You can apply online and be approved almost instantly. You never have to go to a bank and deal with their bureaucracy. Or phone calls. Or forms and forms and forms.
The downside is that merchant advances have much higher interest rates than traditional financing options. Below are a few common options that I've researched.
- $5,000 to $50,000 according to their website, though we were offered more
- Repayment schedule based on remittance rate, not time
- Requires you to use Shopify Payments as your payment processor
- Look in your Amazon Seller Central account for an offer and details
- 3-12 month loans
- Interest rates from 11.9% to 16.9%
- Loans up to 25% of your annual Paypal sales but not more than $97,000 for your first loan
- Repayment based on repayment percentage, not time
Getting money to fund a new business is hard. I recommend paying for as much as possible yourself or perhaps with money from friends and family. Once your business has proven itself with two years of profitability, you will have more options, even if you don't want to sell off any of your company.
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