Financing and Bootstrapping

3 min read

Financing and Bootstrapping

At present, business is merely a place of competition. The number of businesses is increasing every second, it seems. Starting a new business, therefore, requires a good plan. As one has set up their mind to start a new business, whether it is an organization, sales, or other agencies, the first thing needed for commencement is a good investment. This would define success or loss in the future. Investment and capital of businesses are terms to learn at this point, and here come the ideas of financing and bootstrapping.

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Financing and Bootstrapping: Definitions


In simple terms, financing means the process of taking loans. When a new businessman has a shortage of money for their business, they tend to look for financial institutions, such as banks, to provide them with money. This money is usually a large sum and used in investment in the starting business. A loan is only provided when the person ensures to repay with additional interests. Financing is only possible is the business has a sufficient amount in his possession to repay the loan.

On the other hand, bootstrapping is the process of starting a business with the stored money of the businessman, regardless of amount. It is usually a small amount, meaning a small capital is invested in the business. The owner’s acquired skills come handy at this. Bootstrapping means the business starts with little or no assets.

This usually works for small businesses. The owner needs to have good management skills to improve business by the means of bootstrapping for the capital. This determines the profit or loss of the business and the ultimate financial condition and resources of the owner.

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Features of Financing

Features of Financing

There are various types of financing with a difference in the way the loan is provided for investment.

Equity Financing: The financial institution would provide full support for the investment of the business with no requirements for repaying the loan taken. But the institution would have control over the business. The strain of financial loss or gain is reduced as part of it would be for the institution.

Debt Financing: This is the most common form of a loan. The businessman takes a loan with the promise of repaying the money, with interest. The institution would have no control, but the money needs to be paid back. Once the money is repaid, the relation with the institution ends.


Advantages

  • Financing elevates the time value of money (TVM) that allows surplus money for future projects.
  • There is no financial burden of the businessman since the investment they gain is huge with plenty to keep at hand. Also, through their sales, they earn a profit.
  • It makes the business cheaper since the businessman is having financial support. Over time, the interest decreases with the amount repaid. There are no time limitations usually.
  • There is less chance of financial loss since it’s not self-money.
  • Flexibility in the business due to ample resources and capital.
  • Relationship with financial institutions means that during times of stress there is the chance of gaining financial support.

Disadvantages

  • The entrepreneur has little or no ownership over their business since the investment comes from someone else.
  • Additional charges need to be given for the taken money.
  • There is a risk of loss in business. This might put the businessman at risk with the financial institution that provided support. They may suffer issues to repay.
  • Some decisions in business need to be consulted with the investors before applying those. There might be disagreement with the shareholders.

Features of Bootstrapping

Features of Bootstrapping

The owner’s skills are required to ensure the business’ profits through the available resources.

Sources of bootstrapping include:

  • Trade credit- Taking supplies from a salesman well known on credit.
  • Factoring- Selling products with receivable money.
  • Leasing- The payment of the part used by the owner.

Mainly done by businessmen who sell products online.


Advantages

  • An inexpensive way to leverage the business’s cash flow.
  • The owner has full control over the business
  • The money spent is less since no additional charges are present.
  • Over time, as the business flourishes, the whole profit belongs to the owner.
  • Minimal capital and maximum business development with good management.

Disadvantages

  • There is no additional financial support, so this puts the owner in financial strain.
  • This type of capital is only possible for small businesses
  • There might be limitations in resources and business facilities due to insufficient money.
  • In cases of loss in the project, there is a danger of financial loss as well.

Factors to Consider on Financing and Bootstrapping

Factors to Consider

Both the finances prove to be useful and at times ineffective. But there are yet certain factors to consider before starting a business and plan for its investment.

  • Storing a sufficient amount of money as much as possible as a means of financial safety.
  • Investments should be done wisely and with proper planning. The amount used needs to be decided after a thorough understanding of the business to be started.
  • Even with a small business, the little profit that comes is important in the long-run. So, every penny earned has to be counted.
  • Stocks need to be saved for future use, even if these seem to bring loss.
  • Time allocation of the business is also needed. This involves monitoring the condition of the market place from time to time and certain situations that may arrive. Decisions or strategies are needed to be confirmed at the right time.

A businessman needs to fix their goals before entering the business world. After consideration of the structure of their business, they need to decide on the way of investment. It may be either financing or bootstrapping, both could lead to either success or loss.

There are no best means as it depends on the entrepreneur’s skills and management strategies at the end. The best businessman is the one who works hard to stay in the competition with skills, ideas, focus, dedication, and proper planning.

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