Bootstrapping : Meaning, Sources, Strategies & Benefits

What is Bootstrapping?

Bootstrapping is the process where an entrepreneur starts a business using existing personal resources like personal equipment, office space, or personal savings or with minimal external resources. It’s a way of deploying resources to their maximum utilization and reducing costs for business. Bootstrap financing is one of the best and most inexpensive ways by which an entrepreneur can raise capital without sharing equity or borrowing huge sums of money from external sources. Bootstrapping utilizes all the unused potential of a business by simply managing the finances better. The entrepreneur reinvests the revenue of the business for growth and expansion. An entrepreneur is said to be bootstrapping when he builds a startup from his personal sources of funds or from re-investing the revenue of his startup. It is the beginning of a startup journey, where all the primary investment in a business is made by its founders without approaching any investor.

Although bootstrapping might fail to fulfill all financial needs of a business and may cost the same as the external sources of finance, bootstrapping delivers two very important factors, which can be also referred to as the USP of bootstrapping:

• It rests the complete control in the hand of the owner which allows better space for creativity.
• Absence of external finance or minimal external finance reduces the burden of the business.

However, in the modern startup war of valuation, dilution, and funding bootstrapping is losing its relevance and is now not even considered as an option.

Sources of Bootstrapping

Bootstrapping is the process of starting a business with minimal external funding and internal finances. However some primary sources of bootstrapping includes:

1. Trade Credit: Trade Credit as a source of bootstrapping means procuring goods or raw material on credit. It includes establising strong relationships with suppliers, negotiating favorable trade credit terms, understanding the payment terms, and tracking trade credit usage. It is difficult for startup to obtain such facility in the inception phase as the credit system works on mutual trust between two parties and in case of a startup, getting such trade credits is a work of effective communication by the founders. They have to set an excellent relation with the supplier. In such case start up can prepare its financial plan and explain their business model to the supplier. Supplier might provide a credit period without charging any interest and it allows a passage of some time to the business to pay off to its supplier later which will help the business to avoid investing much capital as working capital, which will help in mobilizing funds towards proceeding with the main business.

2. Customers: Customers can prove to be very important source, as they might provide you with a very valuable document i.e. letter of credit. So, whenever the business has to process any order from a customer, they might use the letter of credit as a security to procure the raw material. With the help of letter of credit, the business will be able to purchase the raw material without using any funds. So this way the business can turn the customers as an asset to the startup. Customer can also help the startup by spreading word of mouth, as in the initial stage of any startup the business might not be able to invest funds in marketing and promotion by using bootstrapped funds, here customer can prove to be really important source of promotion and advertising, which in turn will bring new customer and will generate economies to the startup.

3. Management of Expenses: It is important for the entrepreneurs to stay in line with the finances and expenses. Reducing expenses is as good as procuring funds for the business. Entrepreneur should make informed decisions about the needs and requirements of the business, he should employ only those assets which are of utmost requirement, he should be aware of the interest rates for procuring funds. At the initial stage, with bootstrapping as s source of finance one should use the best cost benefit analysis. Monitoring expenses closely and identify areas where costs can be reduced or optimized is important. Some examples to reduce expenses maybe- Renting office space rather than owning, using used furniture, employ relatives instead of new employees, should restrict themselves from drawing from the business, etc.

4. Cash Flow Mangement: Under bootstrapping, the entrepreneur relies on the cash flows generated by the business for further re-investing into the business again. The entrepreneur has to manage regular cash flows through negotiation with customers and demand faster payments for the products or services delivered, this will make sure that business gets regular cash inflows on regular basis and business would never face cash crunch situation. Entrepreneur needs to negotiate in a way that offering credit period would not impact the cash flow cycle of the business. It is advised for entrepreneurs to stay frugal in the beginning phase and should make sure all the cash flows that business earns should go back to business only.

5. Real Estate: Real estate is another bootstrap financing source. There are several ways to take advantage from real estate as a source to bootstrapping. The first is simply to lease out the facility required by the startup. This will help to reduces startup costs as it costs less to lease a facility rather than it does to buy one. In a case, when owning the business is crucial, then the business may rely on financing the building or land for a longer period and plan the loan schedule in a way that will help the business to pay less amount in the beginning and will continue to pay the residual installments as and when the business booms up.

6. Equipment Suppliers: In case a business model requires lots of equipment to commence its operations and offer value to customers, than the business might just end up writing cheques to it’s suppliers for the payments of equipment rather than saving working capital for deploying it in the business. In order to mitigate this scenario, the business might engage with the supplier to offer equipment on credit and the pavement will be made in installments. This way the business might structure the payments terms with equipment supplier and create it a source of bootstrapping. This way business will save in paying the upfront amount to the supplier.

Strategies of Bootstrapping

Bootstrapping is featured with minimal external finance and re-investment of returns, hence creative strategies are required to fuel up the operations and growth. Bootstrapping Strategies includes:

1. Create a Profitable Plan: Planning is necessary, and it will help the entrepreneur to organize things and understand the vectors of movement in the startup world. Formulating a profitable business idea that will serve a target market, this will not only help the entrepreneur but will help the business to grow many folds. A business can also think to re-invest all the profits into business without drawing.

2. Networking: Networking is extremely useful to widen the circle of business relationship, the entrepreneur may use networking opportunities and communicate with a network of contacts. This could turn out to be helpful in many ways, say there is a well known blogger who can write about your business or a graphic designers who will make a unique logo or a marketing lead could carve out a outstanding marketing plan just out of networking.

3. Lowering Expenses: Reducing expenses is as good as generating revenue, reducing all expenses can help an entrepreneur to help reduce cash outflows ultimately benefitting business. This includes exploring cost-saving measures, such as negotiating better deals with vendors, utilizing technology to automate tasks, and reducing unnecessary expenses.

4. Optimizing Pricing: A business might make more money with the same product if they optimize the right pricing. A formal or informal market research can be helpful to gain pricing insights, now a days you can hire agencies to do market research for your product, better pricing optimization will help the business to capture better market share.

5. Keeping Customers: Retaining initial customers can create a stable and sustainable path for a business and contribute significantly towards growth. An entrepreneur should put efforts to gain their repeat business and earn high customer ratings to grow their reputation and client base. Implementing a CRM system significantly help in revenue growth and profitability.

6. Negotiations: A healthy negotiation will help business to procure right products at the right price at the right time. An entrepreneur can negotiate with a suppliers to offer a discount for early payment of their invoices. Also, the entrepreneur can negotiate with suppliers to get more time to pay if a supplier offers 30 days with no interest, try for 45 or 60 days credit period.

Advantages of Bootstrapping

Bootstrapping is the best process to light up the business idea of an entrepreneur. Bootstrapping comes with several benefits as mentioned below:

1. Full Ownership: Bootstrapping is a great funding option as it doesn’t dilute ownership. When a business bootstraps, and the co-founders will remain the sole owners of the company. Also Founders will maintain their equity and enjoys the full return from the business which is further re-invested to fuel up the growth.

2. Greater Control: In any business the founder will have better control over the decision their company takes. In taking any business decision like when the business wants to try an alternate product design, shift their business model, or completely change the business structure, in these crucial business decisions the founders will don’t have to worry about getting the go-ahead permission from investors or other stakeholders.

3. Concentration of Power: As the majority control will lie with the entrepreneur, it allow him to focus more on building a strong foundation for commencing operations through trial and tests without worrying about the intervention by any other party, which will help them to develop more sustainable growth.

4 Risk-Reward: When entrepreneur bootstraps their business, they gets a wealth of experience while risking their own money only. It means that even if the business fails, he won’t be forced to pay off loans or other borrowed funds. If the project is successful, the entrepreneur will save capital and will be able to attract investors on his own and the profits will be his own.

5. Hassle- Free Funding: Attracting external funding can be challenging and can be a very stressful and time-consuming phase for an entrepreneur. Bootstrapping allows an entrepreneur to focus on the main aspects of the business, such as sales, product development, etc. without giving much focus on the challenge of raising external funding.

6. Maintain Spending Habits: Minimal resources ensure that the founders don’t waste their money on things that are not priority for turning business into a success. This leads to better spending habits in the long run for the business as the resources will be spend on only material aspects. Founders who bootstrap often avoids additional expenses to the time they turn profitable.

Disadvantages of Bootstrapping

Like everything, bootstrapping is associated with cons as well:

1. Stagnant Growth: The Business growth can be difficult in a case when the demand exceeds the company’s ability to offer or produce services or products as the company will be able to gather limited resources by bootstrapping.

2. Higher Burden: When a business bootstraps, the entrepreneur has to take on almost all the financial risks instead of sharing them with investors or other stakeholders, who would share the risk and responsibility if they would have invested in supporting the company’s growth.

3. Less Credibility: Without connecting from established investors, it can be significantly harder to find the connections which are required to build the brand, prototypes, and more. Entrepreneur has to develop his own customer base and find collaborators on his own without funding, guidance, or introductions from someone who knows the startup landscape very well.

4. Limited Capital and Lack of Investment: Under bootstrapping, entrepreneur might not be able to gather large investment and resources for the business, this could lead to problem of lesser funds for expansion or diversification.

5. Insufficient Capital for growth: Bootstrapping is helpful for arranging funds only in early phase of the business, in initial phase the business might limit there resources but once they create a significant market share, business can’t depend upon bootstrapping as fund requirement will be much more to retain and grow the market share.