What is Bootstrap Financing?

Bootstrap financing is a unique way of financing your business goals without actually going into debt. Most people who engage in bootstrap financing want to avoid taking out loans. They also likely have a relationship with their business community that allows them to survive on very little cash. Bootstrap financing does not work for all types of businesses due to the way it is carried out.

Examples of Bootstrap Financing

There are a number of practices that can fall into the general category of bootstrap financing. One of these practices is operating with vendors through letters of credit, or IOUs, without actually providing cash. For example, if you want to provide a shipment of steel to a real estate developer, you will need to buy that steel from a manufacturer. You can consider taking business loans to do this, or you can provide the manufacturer with a letter of credit. The vendor gives you the steel with this promise in hand, and you deliver the steel to a customer. Once your customer buys the steel from you, you can then transfer the cash you received to the original vendor. 

Good Uses for Bootstrap Financing

Bootstrap financing is best used by companies who work as middle-men. They can supply a letter of credit from themselves or their customer in exchange for the goods. Companies who have a very fast accounts receivable process, meaning their clients pay immediately, have a better chance of making bootstrap financing work. Those companies, such as real estate developers, who see long lapses in cash flow while bringing a product to market, will have a harder time making this model work. Importer/exporters, traders and other middle-men are better candidates.

Benefits of Bootstrap Financing

Bootstrap financing is truly a form of short-term debt. It allows your business to finance purchases directly from your vendors instead of going to a bank. As a result, your debt load remains very low and does not show up on your balance sheets for the most part. When you seek investors in the future, you will appear to have little to no debt at all. Further, after years in the same industry, you can achieve financing through your vendors at rates much lower than you will see through banks. Bootstrap financing becomes mutually beneficial for you and your counterparts because it keeps expenses low and prices low as a result.

Risks of Bootstrap Financing 

All businesses will need credit at some point. Even if you are avoiding commercial financing, you will need to have a good credit score to lease an office building, find investors or even take the company public in the future. Operating your business without any loans at all will prevent that business from developing its own identity on the credit market. Further, if your customers do not purchase the product you have financed to bring to market, you will be on the short-end of the deal. You will have to come up with the cash yourself if you cannot sell the item on time.