Bootstrap financing is to build a business out of little or nothing with no or minimal outside capital. But why use bootstrap financing?
Advantages to Boostrap Financing:
Besides being one of the most inexpensive ways to raise capital for your business, bootstrap financing also looks good to outside lenders when the time comes to raise money through these routes. It also makes your business more valuable since no money was borrowed and no equity positions of the company had to be given up. Also there is no interest that must be paid since the money you get is generated from your own business and it’s resources.
Types of Boostrap Financing:
- Factoring- Using your accounts receivable to generate cashflow by selling them to a "Factor," at a discount, in exchange for cash.
- Trade Credit- If your business can find a vedor or supplier to extend trade credit and allow you to order goods on net 30, 60, or 90 day terms, that is another form of bootstrap financing you could use. If your business is able to sell the goods before the payment is due, then you just generated cashflow without using any of your companies own cash.
- Customers- Your business can use a letter of credit from your customer to purchase materials without using any company resources. Just like when a contractor has their customer pay up front and then uses that money to buy the materials they need to complete the job.
- Real Estate- Leasing, refinancing, and borrowing against equity is a great way for a company to generate capital by using its own assets.
- Leasing- Free up cash by leasing equipment rather than purchasing outright.