While starting any business, there are different ways to finance that. Bootstrap financing is one such way whereby you will use your own money or resources to sponsor the venture. If bootstrap financing is possible then it reduces the dependency on banks or investors. You can run your own business according to your own decisions without depending too much on what others have to say.
Normally, such financing is possible for small organizations only. To get success with bootstrap financing it is necessary to ensure that the business finances are managed optimally. On one hand where there is full control over the management, the other hand should be careful about the cash flow and other financing decisions.
Sources of bootstrap financing
- Trade Credit
While doing business you have to procure materials from your vendors or suppliers. Now, while paying them there can be different methods like cash payment or you may go into credit terms. Your supplier may allow you a credit period of say 30, 40 or 60 days before you pay them in cash. This is known as trade credit. It is one of the best sources of financing your materials.
In order to get trade credit you have to be in good terms with the suppliers and must do payment at the right time. Once you have successfully run a system of trade credit you will find that you are able to finance without cash.
Customers are also a good source of raising capital. If they provide you a purchase order you can also get raw materials against that. However, in order to do that you need to have goodwill in the market. When you get raw material from your supplier against a purchase order or letter of credit from your customer it ensures that you do not have to block your working capital for procuring the raw material. Finance your projects without making many changes in your cash flow.
Advantages of Bootstrap financing
You will get the following benefits by trying out this method of financing
- As the amount borrowed by you is less your equity will be secured.
- You do not have to bear interest and thus your business will be saved from paying high interest rates.
- Your market position will be better as you will have lesser debt in the market.
- You can have full control over your business that means you can take decisions that you think will fit your business.