Bootstrapping is a common word used in the startup funding. Every emerging startup has gone through bootstrapping phase. It is a one of the famous modes of financing for startups. This article will help you to understand Bootstrapping phase.
An individual is said to be bootstrapping when he builds a startup from his own sources or from revenue of his startup. It is an initial stage, where all the money invested in business by its founders from their own funds without any investor.
The common mistakes made by most of the startups is that they incurred more expenditure on marketing, buying new offices that leads to higher expenditure in the inception phase, it results in wasteful expenditure. Whereas, when the founders bring money from their own pockets they spent it only for “what actually a business needs” that results in wasteful expenditure.
Some of the common methods of bootstrap: –
1. Leasing: –
In simple words taking premises, machinery, furniture, etc. on rent from vendor rather than buying them and invest huge funds in it. It will help to reduce capital cost of startup and results in having more funds in hand to be used for production or in operations.
Leasing arrangement also provides tax benefits to lessor & lessee. Lessee can claim rent as an expenditure whereas lessor enjoys the benefit of depreciation on asset.
2. Trade Credit: –
It means obtaining goods or raw material on credit. It is difficult for startup to obtain such facility in the inception phase. In such case start up should prepare its financial plan and explain it to the owner in case where the supplier is having small business or CFO.
It is recommended to meet in person with owner or CFO and explain financial plan. Here, communication skills play a very important role. However, a startup can also use credit card for obtaining credit for shorter period of time.
3. Factoring: –
It is also big task for a startup to recover money from customer against sales. In case of new product start up sales such product on credit basis to vendors. Here factoring adjustment comes in picture. Factoring is a financing method where startup can raise finance against receivables.
Here, factor holds the receivables and assumes the task of collecting receivables. It can be performed without informing customers that their account has been sold.
This process reduce cost for a business organization in relation to maintaining receivables like collection, verification, etc. however, a factor also charges some charges. In such a case proper comparison should be made whether it is profitable or not to enter in a factoring or not. In most of cases it is fruitful to utilize this financing method.
The whole arrangement results in immediate cash inflow for a startup to meet its other commitments.
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