Bootstrapping is one of the strongest forms of entrepreneurship, meaning start and proceed a business without external capitals. They will survive through very little money and no outside investments to build their business.
That makes the very difference between bootstrapped start-ups and fund-raised companies. Bootstrapped businesses expect to have slow and quiet growth, focusing on business models to offset the costs. On the other hand, companies involved with external funding or help will be expected to have a higher growth rate so that they could strategically meet the investor’s ROI.
Many of the successful companies had their beginnings as a bootstrapped company. Including,
- Dell Computers
- Facebook Inc.
- Apple Inc.
- Coca Cola Co.
In this article, I will write about bootstrapping in business, financing methods, stages and pros and cons of bootstrapping.
Bootstrapping Financing methods
- Owner Financing: The use of personal income and savings.
- Personal Debt: Credit card debt, personal loans
- Sweat Equity: A party’s contribution to the company in the form of effort.
- Minimize Operating Costs: Keep costs as low as possible.
- Inventory Minimization: Requires a fast turnaround of inventory.
- Subsidy Finance: Government cash payments or tax reductions.
- Selling: Cash to run the business comes from sales.
- Early Stage
The entrepreneur utilizes personal savings or borrowed or investment money from friends and family. Also, the founder might be running or working for other projects.
- Customer and (or) Sales-Funded Stage
In this stage, money from customers is used to keep the business operating and, eventually, funds growth. Once expenses are met, growth will speed up.
- Credit Stage
In the credit stage, the entrepreneur must focus on the funding of specific activities, such as improving equipment, hiring staff, etc. At this stage, the company takes out loans or may even find venture capital, for expansion.
Companies Eligible for Bootstrapping
- Early-stage companies
They do not need a large amount of capital which will allow for flexibility for the business and time to grow.
- Serial entrepreneur companies
The founder has capital from the exit of previous companies they can use to invest could reap the benefits of bootstrapping
Advantages of Bootstrapping
- Full control
Founders will hold total control over the finances which allows them to maintain control over the organization’s cash flow. Equity is retained by the owner and can be redistributed at their discretion. This can ensure that the business is moving in the direction desired, according to the founders’ vision and cultural values, without any external influence, and when successful, keeping the profits for themselves.
- Low barriers of entry
Start with the founder’s own money means that super-efficiency is necessary. Solving problems without external funding means that bootstrappers have to become resourceful and develop a versatile skill set.
- Focus on the business itself
Raising external finance can be a very stressful and time-consuming task. By bootstrapping their company, founders can concentrate on the core aspects of the business such as sales and product. Additionally, due to the limited cash supply, it’s normal to have alternative options such as factoring, asset re-financing, and trade finance with bootstrapping.
Disadvantages of Bootstrapping
- Personal liability – High risk of failure
All financial risks pertaining to the business in question all fall on the owner’s shoulders. The owner is forced to put either their own or their family/friend’s investments in jeopardy in the event of the business failing.
The founder needs to become adept at handling stressful situations that might crop up if you finance your company using debt to another person, such as family members and friends. Understanding what is expected and communicating this clearly to others can help you cope with the stress of the situation.
- Limited cash flow
Without the aid of occasional external sources of funding, entrepreneurs can find themselves unable to promote employees or even expand their businesses. A lack of money could possibly lead to a reduction in the quality of the service or product.
One reason some bootstrapped companies are unsuccessful is due to the lack of revenue: Profit may not be sufficient to meet all costs.
Starting a business most often requires very long hours of work just to keep your business going, plus, usually, there is no stipend to go with this effort. All problems are yours, as hiring staff is not usually an option.
Building your own financial foundations is a huge attraction to future investors. Investors are much more confident when it comes to funding businesses that are already backed and have shown promise. Flaws can be corrected with growth, such as product and service. Therefore, perfection at the launch of the business is not a necessity.