Definition: Bootstrap financing can be defined as a self-raised startup where the entrepreneur incorporates an enterprise with limited capital available. The idea is to keep the external borrowings at the lowest and relying on the internal finance sources.
Bootstrapping is setting up a small venture with whatever is available with the founder or can be arranged from the various alternative sources other than debts.
Content: Bootstrap Financing
You must be wondering, how to go about bootstrap financing a new venture?
While some of these bootstrapping sources are the ones we have mostly heard our elders talking of, but many are developed as a result of innovative resourcing.
Let’s introduce you with each these ways below:
- Personal Assets: An entrepreneur first thinks about what’s in his/her pocket. Hence, most of the startups are financed by the owner’s assets.
- Family and Peers: The owner can also seek financial support from his/her family, relatives or friends for a new venture.
- Money Pooling: A founder may find many helping hands from his/her contacts including family members, peers another known one; each of whom agrees to contribute a small sum for the startup.
- Co-Founders: A partnership venture is always a good idea when it comes to limited funds. Since the financial burden is shared among the founders.
- Vendors: A unique source indeed, but vendors may provide certain resources or services in exchange for small equity holding in the business, rather than money.
- Joint Utilization: We have often heard that two or more startups run under a single roof, where they share premises, employees, resources and equipment to cut down their operating expenses.
- Microloan: There are multiple microcredit schemes, which help the financially weak segment of the society to establish startups; however the amount credited is very low.
- Crowdfunding: Social media can do wonders even when it comes to the accumulation of funds. The entrepreneurs can publicly appeal on crowdfunding sites to contribute a petty amount as a donation for their business idea.
- Small Business Loans: The government initiates various credit programmes or schemes to encourage women entrepreneurs and young minds in realizing their startup dreams.
- Factoring: Under this source of bootstrap financing, a commercial entity purchases the bills receivable in exchange for credit at a discounted rate.
- Trade Credit: The suppliers usually allow credit purchase to their regular customers or bulk buyers. Thus, the business can avail raw material on credit payable within 1-3 months as per the seller’s convenience.
- State Tax Credit Schemes: The government allures new enterprises with tax relaxation or subsidies. For the companies dealing with a social or national concern, such relieves can be huge.
- Real Estate: If the owner is left with a surplus space after setting up the business unit, he/she can rent or lease it out to acquire additional funds.
Advantages of Bootstrapping
Bootstrap financing can be a phenomenal idea when the business is not at the stage of attracting investors or financial lenders.
This unique financing concept is known for its following benefits:
- Improves Problem-Solving Ability: It is believed that in difficult situations one finds extraordinary ways to conquer over it. So is the case when an entrepreneur needs to manage with a handful of resources in a bootstrap organization.
- No Burden of External Funding: Bootstrapping provides far better funding options rather than loans to shred away the debt burden.
- Polishes Entrepreneurial Skills: The entrepreneur learns to adjust maximum resources in a small budget, thus, inculcating entrepreneurial management skills along with no quality compromise.
- Creates Innovative Business Structure: When every problem is dealt with a unique solution. The whole business structure is resourcefully designed to fit everything into the budget.
- Delivers Value to People: A startup always gives a lifetime experience to the owners, employees, associates, etc. Also, it creates worth to customers.
- Freedom of Management: By bootstrap financing the business, the budding entrepreneurs need not act as the investors’ marionettes. Instead, they have the liberty to run their enterprise their way.
- Absolute Ownership: There is no risk of losing the business stake when the funds are not accumulated through equity or debts. Thus, there are no shareholders or investors to have a say in business decisions.
Disadvantages of Bootstrapping
When planning for something big, bootstrapping my not work. Other drawbacks of adopting this means of business funding are explained below:
- Personal Financial Risk: While the entrepreneurs pool in their assets to build a new venture, there are chances of losing personal finances in case of business failure.
- Lack of Scalability: With a handful of funds gathered through bootstrapping, it is difficult to plan for large scale production when the business accelerates.
- Not Suitable for High Investment Projects: For setting up an enterprise that needs immense capital investment, bootstrap financing would surely not work.
- Steady Growth: A startup can only flourish if it’s able to seek mass attention. Thus, enormous spending on marketing activities is essential which is difficult to accumulate through bootstrapping.
- High-Stress Level: While in startups with limited funds most of the managerial, operational and promotional activities are to be self-performed by the owners, resulting in exhaustion and stress.
- Limited Network: Unlike angel investor funded enterprises, a bootstrap organization faces a lack of contacts with the vendors, clients, associates and investors.
Bootstrap Financing Example
A real example of a bootstrap organization that has gained success globally and became a 25 billion dollar company today, is Hewlett-Packard (HP).
Difficult to believe but HP has its roots in a one-car garage, where it was incorporated by Bill Hewlett and Dave Packard in the year 1939. The sum initially invested by the founders was just $538.
The company gained its recognition as Hewlett-Packard as a result of a coin toss between the two friends. The first creation of this duo was HP200A, an audio oscillator; since then success became a habit for these entrepreneurs.
Ideas to Bootstrap Your Startup
Now that you know about various bootstrapping methods, you can successfully launch your business idea with the help of below-mentioned tips:
Think of Niche and Minimize Your Cost
Don’t try to introduce extensive features or a wide range of products, instead go for a specialized product category. It would not only reduce the overall cost but also provide brand recognition.
Look Out for Startup-Investor Marketplaces
There are multiple websites which help the budding entrepreneurs to connect with the angel investors or the venture capitalists. This can be a great option while you have already set up the business foundation.
Approach to Small Business Grants
If you are contributing towards resolving a macro-level problem relate to the environment, healthcare, society, education, etc; then availing grants from the government, is a fruitful idea.
Get Access to Crowd Donation Sites
Of course, for a good cause, everyone comes forward to contribute. This is where presenting the business idea on crowd donation sites works magnificently to acquire funds.
Go for Discounted/Free Services and Resources
Why to pay for the things you can avail for free? If legal or management advice can be grabbed from a friend without spending a penny, it is worth saving on expensive consultants.