Three Phases of Bootstrap Financing and Where the Money Comes From
Entrepreneurs who bootstrap their business usually have a primary source of funds. This differs from one business to another, but there are several ways to obtain bootstrap finance: internal business optimization, external financiers, customers, business partners, employees and the owners themselves.
These techniques can be mutually beneficial or harmful to one or more of the sides involved, such as the entrepreneur, business partners and suppliers. Stakeholders cannot be ignored in the process of adopting bootstrap finance. The higher the number of stakeholders, the easier it is to adopt the bootstrapping technique. Business owners who are students are bound to adopt bootstrapping more than non-students. Experience also counts: entrepreneurs who have not established any business before will tend to self-finance.
Bootstrap financing for small businesses and startups moves through three phases.
Beginner phase. At this stage the financing source is derived from credit, friends, family and other related sources.
Customer phase. The funding is obtained from buyers, suppliers and clients.
Credit phase. This is when a company employs more workers and staff and attracts venture capitalists and other investors.
Bootstrapping is not meant to be the only funding source for a business, as it is only viable for the short run. A company that wants to go far will have other sources as well to back it up. However, it is a recommendable choice for entrepreneurs who want to understand better how to run a business and manage the risks involved.
Its advantages are real. The entrepreneur has outright control over the business, owes nobody any form of payment when the company yields profit, and does not have to consult anyone regarding financing. Bootstrapping also enhances proactive thinking, because entrepreneurs have to develop new ways to generate funds. And as the business grows, investors are naturally drawn to the company.
Its disadvantages are just as real. It can be burdensome on the entrepreneur, who has to face the rigor of making tough decisions independently. The funds generated can be minute and not enough to fully scale up the business, and in the case of losses the effect can be debilitating.