Bootstrapping Methods: Non-external Financing Strategies Applied by Start-ups
In the light of vast difficulties that start-ups face while acquiring external funds, new ventures can increase their chances of survivorship by implementing various alternative approaches to acquire necessary financing. The set of methods applied by businesses to generate necessary funding without reaching out for external long term financing is defined as "Bootstrapping" (Windborg and Landstrom, 2001).
The authors Windborg and Landstrom (2001), who performed comprehensive research in the field of bootstrapping, have identified the following
six types of bootstrapping methods that new ventures apply to meet their financing needs:
- OWNER RELATED: Financing by owners' resources. Includes withholding salaries for the owner and family members, owner-contributed resources via private credit card and debt.
- ACCOUNTS RECEIVABLE RELATED: Accounts receivable management involves various techniques to minimize accounts receivable, e.g. discounts for early payments, or fines for the late ones.
- SHARING ASSETS: Joint utilization includes sharing and borrowing of assets with other businesses and owner’s application of personal network to obtain access to certain assets.
- ACCOUNTS PAYABLE RELATED: A start-up can delay payments to suppliers and lessors. This includes financing itself via so called "trade-credit" where the business is charged a relatively high penalty/interest for paying later.
- INVENTORY RELATED: Inventory investment minimization is based on negotiated terms with the supplier, resulting in supplier financing part or all of the stock.
- SPONSORSHIPS: Sponsorship financing implies obtaining government grants or other subsidies to finance business operations and related activities.
Source: Winborg, J. and Landström, H. (2001) "Financial Bootstrapping in Small Businesses" Journal of Business Venturing 16 (3) pp.235-254.
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