Bootstrap finance means using your own money or resources to incorporate a venture. It reduces the dependence on investors and banks. While the risk is ubiquitous for the founder, it also gives them absolute freedom and control over the management of the company. It's usually meant for small business ventures. It is considered as an inexpensive option and also ensures optimal finance management. There are many ways to successfully source business finance.
Sources:
Trade Credit: When a vendor or supplier allows you to order goods, by extending credit on net by 30, 60 or 90 days, it's called Trade Credit. Not every vendor will give you a trade credit, they will however; make all your orders through C.O.D. (Cash or Check on delivery) or take an advance payment through your credit card. In such instances, it's best to negotiate trade credit with your vendor. While seeking trade credit, it's best to approach the person who will approve your credit personally. You would be taken more seriously, if your financial planning is sound, detailed and informative. If your company is successful in its initial stages and have cleared the payments before they are due; then you have generated cash flow, without using your own resources. Your financial planning should ensure avoidance of unnecessary costs through forfeiture of cash discounts or the incurring of delinquency penalties.
Customers: The most important aspect of any business, customers; can be your source of capital. You can obtain a letter of credit from your customer, to purchase goods. Since your company's goodwill and ethics play an important role in this, it's important not to default. For example, if you are in a venture for producing industrial bags, you can obtain a letter of credit from your customer, to source the material from a supplier. In this way you don't have to block your limited capital and still can generate cash flow.
Real Estate: Generating capital using own assets, by the way of refinancing, leasing and borrowing is another finance source. You can lease your facility, as it would reduce your start-up cost. Negotiate your lease amounts to correspond to your growth or payment patterns. If your business needs you to buy a facility, try to cover the cost of the building over a long-term period. Make optimum use of your loan by having low monthly payments, to help your business grow. You can even refinance your loan as per your needs. Outright purchase of the facility will always have the advantage of property appreciation and creation of a valuable asset called equity. Borrowing against this equity can also become an option.
Equipment Suppliers: If your equipment locks your capital, it's best to take a loan for the purchase; that way you would pay for the equipment over a long period of time. There are two types of credit contracts used to purchase equipment. First is the chattel-mortgage contract, in which the equipment becomes the property of the purchaser on delivery, but the seller holds a mortgage claim against it until the amount specified in the contract is paid. Second is the conditional sales contract, in which the purchaser does not receive title to the equipment until it is fully paid for. Another way of getting your equipment is to lease it for a certain period of time. Leasing is advantageous for both; the supplier of the equipment (lessor) and the user (lessee). The lessor enjoys tax benefits and a profit from the lease, while the lessee benefits, by making smaller payments and the ability to walk away from the equipment at the end of the lease term; maybe even towards better technology.
Joint Utilization: This is a method where you can save the cost of running the business by sharing office facility, supplies, equipment and even employees. It's also a great way to build your network.
Angel Investors: Angel investors are affluent individuals, often retired business owners and executives; who provide capital for small business start-up, usually in exchange for ownership equity. They are an excellent source of early stage financing as they are willing to take risk, that banks and venture capitalists, wouldn't take.
Credit Cards: Credit cards can also be used to source businesses. The card offers the ability to make purchases or obtain cash advances and pay them later, the only disadvantage being expensive in the long term.
Peer-to-peer lending: This is a method where borrowers and lenders conduct business without the traditional intermediaries, such as banks. It can also be known as social lending and depends on your social acceptability. Peer-to-peer lending can also be conducted using the Internet, which connects borrowers with lenders.
Money pool: Small sums of money can be borrowed from several family members, friends or colleagues. They will have no legal ownership in the business, but remember to pay back, as nothing causes more tension in a family than money matters if never paid back.
Advantages of Bootstrap Finance
- Since you borrow less, your equity will be secured.
- You won't be losing money in the form of high interest rates.
- Lesser debts, means better market position, for dealing with lenders and investors.
- Complete control of your company will allow you to be free and creative in your dealings.
- Raising finance can be time-consuming, adding losses to your business.
- In long term, bootstrap finance can be an expensive commitment between you and your investor or supplier.
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