Bootstrapping Raising (Money) Capital Techniques

Bootstrapping Raising (Money) Capital Techniques

Bootstrapping Raising (Money) Capital Techniques

Alternative Entrepreneur Capitalization (Raising Money) Methods

Bootstrapping is important for new and small businesses. Among other things, on average, many companies develop and flourished through the use of bootstrapping without access to long-term external financing, over a five-year period (Winborg, 2009). Bootstrapping is a form of raising capital (money) for the business. Many studies demonstrated the important role played by bootstrapping (Brush, N.M., Gatewood, Greene, & Hart, 2006). A large percentage of the businesses examined used bootstrapping to secure resources. These companies had reduced dependency on external financiers for capital. The positive influence of bootstrapping was demonstrated by profitability from the use of some kinds of bootstrapping methods (Patel & Sohl, 2007).

Access to capital continues to be tight. In a third quarter survey of lenders (Phoenix Management Services, 2012), the majority of lenders identified uncertainty as their chief concern regarding future economic growth. Less optimism was shown for opportunities of their borrowers, indicating a slight pullback in their own customer growth expectations and a reduction in new capital investments and hiring expectations.  Respondents were asked whether they plan to tighten or maintain their loan structures i.e., collateral requirements, guarantees, advance rates, and loan covenants. Accordingly, in each of the four loan structures, 82 percent of lenders anticipate maintaining their loan structures in their in the near-term, which showed a slight shift towards tightening loan standards.  For the entrepreneur, use of bootstrapping techniques will continue to play an important role in funding operations.

Bootstrapping can be grouped into three types.

  1. Cost-Reducing
  2. Capital (Money)-Constrained
  3. Risk-Reducing

Ten tested and widely used bootstrapping techniques (Sherman, 2005) include:

  1. As an entrepreneur, save personal costs by wearing multiple hats in managing the business.
  2. Equipment and furniture does not have to be new, acquire or lease used assets in operating the business. Also be cognizant not the over pay for service warranties.
  3. Use a large company to lower costs by sharing office space or subleasing. Try of get access to conference rooms, reception services, and office equipment such as copy machine, etc.
  4. For short-term working capital, apply for several credit cards at once and use the unused credit limit as an operating line of credit.
  5. For inexpensive human resources, utilized the services of retire executives that desire to stay busy and remain “in the game” as mentors. The U.S. Small Business Administration’s Service Core of Retired Executive Program (SCORE) is a great source for such experienced executives. Additionally, hire students that are willing to sacrifice salary to gain experience that can enhance their future. Go to: http://www.score.org/
  6. Maintain excellent customer relations with key customers to encourage them to pay early.
  7. For maximum flexibility and cost controls, commit only to short-term obligations and leases.
  8. As a means of fulfilling a contract, have your major customers acquire the equipment needed to meet the contract and lease the equipment.
  9. Depending on state and federal securities laws, use the company’s shares in lieu of cash with your vendors (i.e., suppliers, landlord, etc.) and professionals (i.e., lawyers, accountants, specialists). Keep in mind the dilution ratio you will be giving up and remember put forth a stock buyback terms.  The company’s shares are illiquid.  Offer them a means to “harvest” their investment with you. Think of the Sam Walton former executives and office employees became multimillionaire with the start up of Walmart.
  10. To acquire and gain access to key products and services utilize commercial barter exchanges.

Entrepreneurs have an explicit motive for using bootstrapping techniques. The deliberate choice of using bootstrapping strategies can be seen in proactive ways from reduce risks, restricting expenses, and funding business activities. Such techniques allow for business opportunities without the need to own a sizable resource base and without the need to source external financing. These methods minimize the need for cash by obtaining resources at little or no cost. Additionally, the use of resources can be acquired without the need for bank financing. Overall, entrepreneurs can utilize their social contacts to obtain free access to specific resources.

 References

Brush, C., N.M., C., Gatewood, E., Greene, P., & Hart, M. (2006). The use of bootstrapping by women entrepreneurs in positioning for growth. Venture Capital , 8, pp. 15-18.

Patel, P. F., & Sohl, J. (2007). Bootstrapping to buffer a venture’s core commercialization processes. Academy of Management Conference. Philadelphia.

Phoenix Management Services. (2012). Lending Climate in America 3rd Quarter 2012. Chadds Ford: Phoenix Management Services.

Sherman, A. J. (2005). Raising Capital (Vol. 2). New York: American Management Association.

Winborg, J. (2009, January). Use of financial bootstrapping in new businesses: a question of last resort? Venture Capital , 11 (1), pp. 71–83.

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