Bootstrapping a startup and building a sustainable business not only requires disciplined cash flow management but also careful management of expenses—you have to be laser-focused on where every dollar goes.
Of course, running a lean startup is one thing; achieving the growth you need to succeed on an extremely tight budget is quite another.
There’s no shortage of advice for getting your bootstrapped startup to thrive without burning up all your cash, including:
Use your resources strategically, prioritizing essential expenses.
Know your strengths and weaknesses—you don’t have to spend money on things you can do yourself.
Utilize scalable third-party solutions that can grow with the business and leverage automation wherever possible.
Identify the parts of your business that truly drive revenue and figure out how to expand or improve them.
Optimize your marketing costs by focusing on your most efficient channels.
Track efficiency metrics and maintain a healthy growth rate.
Reassess your expenses and priorities as the business evolves.
Financial flexibility is a luxury that bootstrappers often don’t have. A little extra cash can go a long way, particularly when opportunity is staring you in the face. So why do some founders play it conservatively and avoid debt?
The Case Against Debt
Entrepreneurs sometimes believe that the purpose of bootstrapping is to remain debt-free. Other opponents believe that debt is too risky, which creates added stress you definitely don’t need. A few erroneously assume that taking on debt will only suck cash out of your business.
Some criticism of startup debt is warranted; much of it is not. Below we debunk three common startup debt myths.
MYTH 1: Bootstrapping means never taking on debt
Bootstrapping a business may mean different things to different founders, but it’s generally agreed that bootstrapping is growing a startup by reinvesting profits generated from revenue back into the business. It means funding operations without relying heavily on outside capital (such as large investments from VCs); but most startups will utilize outside capital at some point.
Bootstrapping is a great way to preserve all or most of your equity while you build your business and find your product-market fit. Some startups might go on to raise equity from VCs, while others bootstrap all the way to an exit. Startup fundraising strategies look different in every business and there’s no rule book governing when and how you source capital.
TRUTH: Plenty of bootstrappers utilize debt capital to grow successful startups and reach their entrepreneurial goals. It's a question of what you think is best for you and your business.
MYTH 2: Debt is too risky
Technology startups, in particular, that don’t have hard assets like other small businesses may be slow to achieve profitability, have been underserved by traditional banks. In order to offset risk, banks typically require collateral, personal guarantees, and restrictive covenants, if they lend to a tech startup at all. It follows that the entrepreneur assumes more of the risk when borrowing capital from a traditional bank.
TRUTH: Today, there are far more debt financing options for startups that align better with the specific needs of a software business, minimizing founders’ risks and maximizing flexibility.
MYTH 3: Debt will only drain your business of cash
Debt can cause cash flow problems, especially when the loan terms don’t jive with your business. And your cost of capital can exceed the return on your investment. The question is: will you grow revenue faster than the interest accrues on the debt? For example, if your debt repayments are 25% of your monthly revenue but you can double your business’s revenue in a year, then you’ve got a pretty good return on your investment once the loan is paid off—and impressive momentum.
TRUTH: Debt can provide more flexibility, less dilution, and faster access to capital compared to equity funding, making debt the better option to finance early-stage growth initiatives or to jump on clear and present opportunities in the market.
CASE STUDY
On the Practical Founders Podcast, Rob Farrow, co-founder of Aisle Planner, explained in detail why he kept taking non-dilutive debt from Lighter Capital—6 rounds in total—instead of angel or VC money. His fundraising ethos eventually led to a lucrative acquisition.
“I took $150K in the first round,” Rob explained. “To me, it was an invisible employee — our monthly net was the cost of an employee. We were able to use that money to put ourselves at some events we couldn’t afford to go to, which helped elevate our relevance in the audience we were targeting.”
So, should you avoid debt when bootstrapping a startup?
No. While debt does come with some risks, so does other outside capital. If you have an opportunity to grow with the help of extra cash, and the payoff outweighs the cost of capital, it’s absolutely worth taking on manageable debt.
That said, it’s worth knowing how to use debt to your advantage and how to minimize your risks.
How Bootstrappers Can Effectively Use Debt to Grow
With any outside capital you bring in, you need to have a plan and do your due diligence. Debt capital can be a powerful and affordable tool for growing a startup, but it can cause financial stress if you’re not careful.
Lighter Capital has helped more than 500 startups grow, providing over $350 million in non-dilutive debt capital. Our team has seen it all! It’s true that founders do get into trouble borrowing money sometimes, but it’s easy to avoid when you know what to watch out for.
Two of Lighter’s credit and investment experts, who have seen hundreds of financing offers and term sheets while helping entrepreneurs secure non-dilutive growth capital, recently shared valuable insights for founders considering debt on our Bootstrapped podcast. Check out links to listen as well as highlights below.
We also created a guide to help you shop for debt and compare loan costs.
What You Should Know Before Borrowing Capital to Grow a Startup
In this two-part series of Bootstrapped: The Lighter Side, Patrick Philley, Lighter Capital’s Manager of Credit & Underwriting, and Tanner Kovacevich, Lighter’s VP of Sales, discuss the hidden costs and hidden risks they frequently see founders miss when taking on debt. Learn how to navigate the intricacies and potential pitfalls of funding a startup with debt from seasoned experts who have been helping entrepreneurs grow on their terms for nearly a decade.
Listen to Part 1
Lighter Capital | Apple | Spotify | YouTube
Episode Highlights
Debt vs. equity. When you should take debt and when you should take equity.
Understanding the true cost of borrowing. Some lenders are transparent about APR and total costs—we’ve seen term sheets from many that aren’t. Without a background in finance, it can be really tough to know what your true costs are.
How to spot hidden fees. We often see term sheets that don’t disclose the APR or they present other types of rates and fees you might not fully understand. Legal fees, origination fees, draw down fees, and exit fees can add extra costs that aren’t included in the rate that’s presented, and these can vary widely between lenders.
Deceptive terms you might encounter. APR is the best way to compare loans, apples to apples. Discount rates, amortization schedules (that may be monthly, weekly, or even daily), and shorter term lengths can mislead founders into believing the APR or cost of borrowing is much lower than it really is.
You should feel confident you’re going to get a return on your investment. If you have an emergency cash flow problem, a debt facility with a really short payback period (e.g. 3 months) can sometimes be a good solution. But most early-stage businesses looking to fuel growth get the greatest benefit from longer-term loans.
Cost vs. value. Understand what a lender can provide outside of capital. Are you agreeing to just a simple transaction, or can you get access to things like a partner network and connections to help you grow your business? Can you talk to other customers to understand what your experience will be like with that lender?
Listen to Part 2
Lighter Capital | Apple | Spotify | YouTube
Episode Highlights
The true cost of dilution. A lot of founders don’t realize until it’s too late that equity is their most valuable asset and, in most cases, it’s best to delay equity dilution as long as possible.
One big advantage of using debt to grow. You can get the traction you need to receive better terms and higher valuation from equity investors or buyers.
3 case studies. One founder avoided diluting himself out of ownership in the company; another founder earned millions in equity delaying a VC raise with debt funding; the third company went from bootstrapped to venture-backed by Andreessen Horowitz, Sequoia, and Altimeter.
3 strategies for maximizing ROI from debt. Manage your cash runway and apply for financing when you have cash to get the best terms. Keep your financials clean to increase trust with capital providers. Take on debt at an inflection point, such as closing your largest contract to date, for optimal success.
Make sure the structure of the financing fits your business model and use case. The term length needs to give you enough time to generate a return on the capital investment. A longer payback period gives you more flexibility with cash flow and with your ability to plan and grow your business.
Terms and conditions to look out for. Personal guarantees and covenants both add unnecessary risk, reduce your flexibility, and stress you out. Is there a cure period for a breach of covenants?
Additional benefits offered by the lender. The most value a financial partner can bring is customers. Access to discounts on business solutions can also help you grow and save money.
Debt Funding Buyer’s Guide
Whether you’re considering financing from traditional banks or funding from alternative specialty lenders, it can be difficult to evaluate loan costs across multiple offers with disparate term sheets and complex repayment structures.
Some lenders make loan terms and payment structures confusing by design—if you knew what that money was really going to cost, you might not even consider it. When you can’t fairly compare an offer against others, it is harder for you to know which offer is best for your business. And, plenty of lenders will do whatever it takes to get the deal done without regard for your startup’s long-term success.
We’ve made a ridiculously thorough buyer’s guide, broken down into 10 questions you should ask, to help you make a well-informed decision about debt funding for your startup.
Grow steady with us.
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