Skip to main content Skip to search
Bootstrapping finances with its pros and cons

Bootstrapping a start-up company is a situation where the owner starts the start-up with seed money in hand. Every successful company has a history of bootstrapping. Before the management team accepts the venture capital or any means of external funding, they have entirely bootstrapped the company. Bootstrap financing company is an attempt to create a financing company with personal funding or through the revenues of the newly created company. Generally, self-made entrepreneurs are very rare. To start a financial company or organization, entrepreneurs need to have confidence in taking risks and must be self-disciplined and determined. In simple words, bootstrappers collect some ideas and with their skills and knowledge, they create a business without any funding from external investors or with any high amount of capital. 

Examples of Bootstrap financing: 

There are numerous examples which fall into the category of bootstrap financing. One of the common method to bootstrap financing company includes operating with vendors via credit letters or through documents acknowledging debts which does not include providing the cash. Let’s take an example of you being an entrepreneur and you want to provide delivery of steel to a real estate developer. Now for this purpose, you would need to buy steel from the vendor or the maker. You can do this by providing the manufacturer with a letter or credit or you can take a loan for buying. Suppose the maker agrees to provide you with the steel and then you can do the shipment of steel to a customer. Now after receiving the money from the customer for the steel you delivered, you can go to pay the manufacturer who gave you the steel. 

Suitable bootstrap financing company:

Bootstrap financing can be is best for those companies which operate as middle-man. With documents that acknowledge the debt, or with a letter of credit for the customers or vendors these companies can exchange products and services. Further, those start-ups whose customers can pay quickly have an upper hand for making bootstrap financing work. Companies like real estate developers, experience late cash flow issues when they launch products in the market so, they will not find bootstrapping a decent model to work on. Furthermore, only traders, import and export companies will find a quality advantage with this model   

Advantages of bootstrapping finances:

Operate costs involved efficiently:

With bootstrap financing your company, you get involved in a model of business where you can get more aware of the cash flow and the regular costs involved in making the business grow. You can start operating the business on a lean business strategy. 

You are the boss 

With no external investors, the owners of the company can take over the control of cash flow. Now the founders of the company will be deciding all the crucial strategies required to operate the growth of the company. Also, This model of the business ensures that business is growing as planned as the owner’s values and vision, without any external funding and they can ultimately keep the profit for themselves. 

Concentrate on the core idea:

No external investment involved is one of the major advantages. This saves time for concentrating on the core idea of the business. Also, due to less amount of cash in hand, asset re-financing becomes a major part of bootstrapping. Moreover, the financial foundation of your business could be a potential attraction for many investors. In the business world, investors prefer those companies whose owners have shown promise and commitment since the initial days of the working. 

Disadvantages of bootstrapping finances: 

Cash flow crisis 

A major disadvantage of a bootstrap financing company is the cash flow issue due to the lack of enough capital that a company needs to generate and grow. In fact, inexperienced business owners are more likely to cause disaster to the company if they take inappropriate decisions.

Imbalance of decisions:

If the startup has two or more founders, then it is more likely to have a dispute regarding decision making. This depends on the founder’s experience, priority as well as the amount of cash invested which can ultimately create revenue collection issues. 

Higher risk of failure 

Along with the pleasure of self-control on the cash flow of your company, you may experience failure and losses too. Also, one thing that haunts bootstrapped companies is the shortage of revenue. The profit generated each time is not enough to compensate for all costs. 

Some successful bootstrapped companies

Many bootstrapped companies around us had to struggle at their initial stages. But they prevailed and all this was possible because of their amazing service and product management. These companies are:  

1. Dell computers

2. Facebook 

3. Apple Inc.

4. Coca-cola 

5. eBay

6. Cisco Systems Inc.

7. Microsoft corporation

8. SAP

Conclusion: 

Bootstrap financing will be a success if you can provide attention to proper financing management and produce the revenue your company needs. Be cautious when you buy. Moreover, closely monitor your expenses. Don’t jump for buying an expensive product when you don’t have enough assets. Finally, try to negotiate terms and conditions with the vendors with proper documentation. You can expect a profitable cash flow when you can execute a routine cash flow with each shipment or order.