Bootstrap financing or Bootstrapping is to build a business out of little or nothing with no or minimal outside capital.
Bootstrap financing or Bootstrapping is the practice of launching a business using only one’s own finances, together with money borrowed or invested from family or friends and revenue from the first few sales. It is a method of financing small businesses that involves buying and using resources at the owner’s expense rather than allocating equity or taking out sizable loans. Bootstrapping is the method of starting a business from scratch with no or little outside investment or financing.
But why use bootstrap financing?
Advantages to Bootstrapping (Boostrap Financing):
Besides being one of the most inexpensive ways to raise capital for your business, bootstrap financing also looks good to outside lenders when the time comes to raise money through these routes. It also makes your business more valuable since no money was borrowed and no equity positions of the company had to be given up. Also, there is no interest that must be paid since the money you get is generated from your own business and its resources.
Types of Boostrap Financing:
Using your accounts receivable to generate cash flow by selling them to a “Factor,” at a discount, in exchange for cash.
If your business can find a vendor or supplier to extend trade credit and allow you to order goods on net 30, 60, or 90-day terms, that is another form of bootstrap financing you could use. If your business is able to sell the goods before the payment is due, then you just generated cash flow without using any of your company’s own cash.
Your business can use a letter of credit from your customer to purchase materials without using any company resources. Just like when a contractor has their customer pay up front and then uses that money to buy the materials they need to complete the job.
Leasing, refinancing, and borrowing against equity is a great way for a company to generate capital by using its own assets.
Free up cash by leasing equipment rather than purchasing outright.