Bootstrap financing – what is it and why it is not without risks

Image credit: Incredibly Numing l Flickr

Bootstrap financing describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments.

By: Hitesh Khan/

An individual is said to be bootstrapping when he attempts to found and build a company from personal finances or the operating revenues of the new company. Bootstrapping in business means starting a business without external help or capital.

Such startups fund the development of their company through internal cash flow and are cautious with their expenses. Generally at the start of a venture, a small amount of money will be set aside for the bootstrap process. This is one of the most popular forms of internal funding because it relies on your ability to utilize all your company’s resources to free additional capital to launch a venture, meet operational needs or expand your business. Other times, you can also structure your payment to your suppliers in phases, so that becomes a form of “free” or low cost financing. Of course most SME lack funds to employ a CFO type character or a financial controller, hence may not know the cheapest form of financing or is unable to strategise the best use of capital. This is where can help. Read more about the different types of financing in Singapore here.

bootstrap financing
Image credit: Incredibly Numing l Flickr

Bootstrap financing is probably one of the best and most inexpensive routes an entrepreneur can explore when raising capital.

Bootstrap financing is a unique way of financing your business goals without actually going into debt. Most people who engage in bootstrap financing want to avoid taking out loans. They also likely have a relationship with their business community that allows them to survive on very little cash. Bootstrap financing does not work for all types of businesses due to the way it is carried out.

There are a number of practices that can fall into the general category of bootstrap financing. One of these practices is operating with vendors through letters of credit, or IOUs, without actually providing cash. Normally, a supplier will extend you credit after you’re a regular customer for 30, 60 or 90 days, without charging interest.

For example, if you want to provide a shipment of cement to a contractor, you will need to buy that cement from a manufacturer. You can consider taking business loans to do this, or you can provide the manufacturer with a letter of credit. The vendor gives you the cement with this promise in hand, and you deliver the cement to a customer. Once your customer buys the cement from you, you can then transfer the cash you received to the original vendor.

However, when you’re first starting your business, suppliers are not going to give you trade credit. They’re going to want to make every order c.o.d (cash on delivery) or paid by credit card in advance until you’ve established that you can pay your bills on time. While this is a fairly normal practice, to raise money during the startup period you are going to have to try and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly prepared financial plan.

Bootstrap financing is actually a form of short-term debt.

It allows your business to finance purchases directly from your vendors instead of going to a lender. As a result, your debt load remains very low and does not show up on your balance sheets for the most part. When you seek investors in the future, you will appear to have little to no debt at all.

Further, after years in the same industry, you can achieve financing through your vendors at rates much lower than you will see through banks. Bootstrap financing becomes mutually beneficial for you and your counterparts because it keeps expenses low and prices low as a result.

But be mindful that bootstrap financing would require you to live within your means, watch costs carefully, find alternatives to cash for building the team and expand the business infrastructure.

With bootstrap financing, entrepreneurs who use their own money or personal assets to get their startup going incur a huge financial risk, especially if the business fails. Bootstrapping means your entire startup rests only on you. If you make a profit, that’s great. If you don’t, you could lose everything. For many startup owners, they forgo a salary in the beginning months. So, if you fail, you’ll have spent time without an income as well.

The financial risks to bootstrapping are huge, so owners must have a plan for moving forward. Also bootstrapping often means that you are without capital for your business expansions and so your growth may be slow. Bootstrapping means you are most likely operating with limited resources and very little staff to help you.

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Written by Ravi Chandran

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