Bootstrap financing comes from the idea of pulling oneself up from the bootstraps. Bootstrap financing is defined as a business that Self-funds its costs. The company will grow as it creates revenue. The goal is to have a business that is self-sustaining. The objective of bootstrap funding is to keep costs low, and avoid debt. Businesses looking to use bootstrap financing to fund: need to be creative to keep costs low.
What are the benefits of bootstrap funding? The biggest advantage of bootstrap funding is avoiding debt. Companies in debt have to please lenders, making lenders the boss. Having debt causes owners to lose their independence, and creative freedom. If an owners’ goal is to live by their own rules, bootstrapping is worth considering.
Bootstrapping removes the distraction of debt, allowing Entrepreneurs to focus on customers. The purpose of a business is to solve a problem. It is impossible to fix customer’s problems, if your company has a bigger problem.
Taking out a loan allows for quick growth in the beginning stages, but can limit growth over time. A business needs quick, sustained growth to use debt as an advantage. This is hard for a small business to achieve. A poor position for a small business is, having to cut production, or close the business.
If an entrepreneurs plan is to start a business, and sell it for a profit bootstrap financing is a good option. A debt free business is more appealing to buyers than a business with debt. When sold a debt free business is pure profit.
Remaining debt free allows total control when negotiating the sale. If the owners plan is to grow a business, and sell for profit: Bootstrap financing is your best option.
Business risks are lower when a company is self-financed. If things go bad, the owner only loses what they put into the business. Zero is better than being negative. Losing savings is bad, but not losing a house is worse. Knowing that will reduce stress, and keep focus in the right places.
Bootstrap financing may be the wrong option for a business. The bootstrap method is only effective in niche or low cost markets. The competition and the owner’s personal-finances will determine if bootstrap funding can work.
To finance a start-up using the bootstrap method, the owner’s personal finances will need to be in good standing. Personal finances can stop any funding source. They become a bigger issue in self-funded businesses. It is impossible to self-fund a business without funds. While planning, a business must have the ability to fund operating needs.
Some businesses are better suited for bootstrap financing than others. If a business needs large amounts of cash, bootstrapping is out of the picture. This will include all businesses that need high sales volume. Production markets are bad places to try bootstrap financing. Few people can fund the costs of starting a manufacturing plant using personal-finances.
If survival is an owners’ reason for starting your business, it will be hard to self-fund. Many businesses begin as a way to fill the owner’s employment needs. If your motivation to start a business is preservation, time is your enemy. Bootstrap companies trade initial profit, for a self-sustaining company in the future. The Entrepreneurs’ personal stability, will determine if waiting is an option.
Competition will be a factor in deciding if bootstrap financing is an option. If you are trying to enter a market that is competitive, bootstrap financing will limit your ability to compete. You need to understand your limitations, when working on a small budget. Niche markets will be your market. Even in a niche markets, you will have to use superior quality as your advantage.
Being a bootstrap company limits growth in the beginning. To use this method, you will need patience. Opportunities will present themselves, and you will be unable to act.
Bootstrap financing limits strategic options available to start-ups. Bootstrap financing is a great option, but is has limitations. This model works best in market with weak competition, and low production costs.
More info: http://www.amazon.com/Understanding-Business-Loans-Grants-Michael-ebook/dp/B00OAUA4XE/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1414011056&sr=1-1&keywords=understanding+business+loans+and+grants