Sources of Bootstrapping

Bootstrapping is the process of starting a business with minimal external funding and internal finances. However some primary sources of bootstrapping includes:

1. Trade Credit: Trade Credit as a source of bootstrapping means procuring goods or raw material on credit. It includes establising strong relationships with suppliers, negotiating favorable trade credit terms, understanding the payment terms, and tracking trade credit usage. It is difficult for startup to obtain such facility in the inception phase as the credit system works on mutual trust between two parties and in case of a startup, getting such trade credits is a work of effective communication by the founders. They have to set an excellent relation with the supplier. In such case start up can prepare its financial plan and explain their business model to the supplier. Supplier might provide a credit period without charging any interest and it allows a passage of some time to the business to pay off to its supplier later which will help the business to avoid investing much capital as working capital, which will help in mobilizing funds towards proceeding with the main business.

2. Customers: Customers can prove to be very important source, as they might provide you with a very valuable document i.e. letter of credit. So, whenever the business has to process any order from a customer, they might use the letter of credit as a security to procure the raw material. With the help of letter of credit, the business will be able to purchase the raw material without using any funds. So this way the business can turn the customers as an asset to the startup. Customer can also help the startup by spreading word of mouth, as in the initial stage of any startup the business might not be able to invest funds in marketing and promotion by using bootstrapped funds, here customer can prove to be really important source of promotion and advertising, which in turn will bring new customer and will generate economies to the startup.

3. Management of Expenses: It is important for the entrepreneurs to stay in line with the finances and expenses. Reducing expenses is as good as procuring funds for the business. Entrepreneur should make informed decisions about the needs and requirements of the business, he should employ only those assets which are of utmost requirement, he should be aware of the interest rates for procuring funds. At the initial stage, with bootstrapping as s source of finance one should use the best cost benefit analysis. Monitoring expenses closely and identify areas where costs can be reduced or optimized is important. Some examples to reduce expenses maybe- Renting office space rather than owning, using used furniture, employ relatives instead of new employees, should restrict themselves from drawing from the business, etc.

4. Cash Flow Mangement: Under bootstrapping, the entrepreneur relies on the cash flows generated by the business for further re-investing into the business again. The entrepreneur has to manage regular cash flows through negotiation with customers and demand faster payments for the products or services delivered, this will make sure that business gets regular cash inflows on regular basis and business would never face cash crunch situation. Entrepreneur needs to negotiate in a way that offering credit period would not impact the cash flow cycle of the business. It is advised for entrepreneurs to stay frugal in the beginning phase and should make sure all the cash flows that business earns should go back to business only.

5. Real Estate: Real estate is another bootstrap financing source. There are several ways to take advantage from real estate as a source to bootstrapping. The first is simply to lease out the facility required by the startup. This will help to reduces startup costs as it costs less to lease a facility rather than it does to buy one. In a case, when owning the business is crucial, then the business may rely on financing the building or land for a longer period and plan the loan schedule in a way that will help the business to pay less amount in the beginning and will continue to pay the residual installments as and when the business booms up.

6. Equipment Suppliers: In case a business model requires lots of equipment to commence its operations and offer value to customers, than the business might just end up writing cheques to it’s suppliers for the payments of equipment rather than saving working capital for deploying it in the business. In order to mitigate this scenario, the business might engage with the supplier to offer equipment on credit and the pavement will be made in installments. This way the business might structure the payments terms with equipment supplier and create it a source of bootstrapping. This way business will save in paying the upfront amount to the supplier.