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