- June 2, 2017
- Posted by: pblafrica
- Category: Blog
What does one need to start a business? Many would say capital and financial resources. It is true that any business operation demands a lot of financial resources to finance operations. Startups are no exception. However, past studies of cases of several startups have established that little or no capital is required for actualizing a passion into an enterprise.
It is no secret that most startups face the challenge of funds availability for operationalization. Banks and other financial institutions depend on revenue flows as a basis of advancing financing. For a startup, this is not possible since no business has been transacted before. Borrowing from other sources may prove expensive and unsustainable.
It therefore leaves the entrepreneur with no option to raise funds from other sources apart from borrowing. It therefore requires the business owner to raise capital from own sources other than external sources. This can be from personal savings or at times, funds raised from selling or owned assets. This exercise where money for starting a business with no or little money is employed establish or run a business is called ‘bootstrapping’. Also, bootstrapping occurs when the new venture uses capital from operating revenues of its own. This is called ‘ploughing back’ money earned from business operations. Bootstrapped firms therefore focus more on profits since the profits made is what keeps the business concern going over time.
Apart from personal savings, the business owner may raise capital in the following ways:
- Being economical in operations and eliminating any excesses especially on operating costs.
- Running a business from quick turnovers or even taking preorders from suppliers and paying later after sales, sell off of owned assets, among others (trade credit). However, most of the suppliers would be unwilling to extend trade credit until they have established a firm relationship with your firm for some time. It will help if one would approach his suppliers to extend this form of credit. In as much as it’s workable, the mode is not sustainable in the long term.
- Selling receivables to a buy in exchange for cash to for instance a financial institution. This is usually common in sectors where receivables are characterized by a long repayment period. The factor (buyer) therefore assumes the risk of collecting the payment. Caution should be taken to take into consideration the factoring cost and hence the price setting must be set with this in mind.
- A letter of credit can also be employed in securing finances to undertake production and delivery of products. This is usually a popular mode in businesses dealing with export and import of goods.
- Credit contracts to finance acquisition of business equipment. In case of a business that is engaged in production of products, one may approach the supplier for a credit facility in which the equipment is supplied and the payments paid over a term in installments. This is convenient to startups since committing a huge amount of cash to the equipment may constraint cash available for working capital.
- Leasing of equipment from suppliers. In this case, the business owner only pays for the part of the equipment he puts in use rather than the whole buying price.
The major advantage of using bootstrapping to finance capital requirements of the business is it removes the burden of having to deal with expensive loan facilities in the nascent stages of the business. It therefore is more convenient and gives the entrepreneur total control over the business decision-making processes. Nevertheless, it should be noted that this form of financing may limit the pace of the firm becoming stable over time. It may therefore be restrictive to expansion of operations and investments in other areas, for example.
However, for startups, this provides the most convenient way to raise capital especially for firms that are just starting up and do not have a firm foothold in the target market. It should also be noted that bootstrapping is not limited to start ups alone. It is a cost effective and inexpensive way to treat existing resources at any stage of the business’ life. It is a sustainable business practice.
Bootstrapping is all about how one manages his financial factors. Its aim is to keep the overheads low while maximizing returns via revenues. Operating expenses too need very close monitoring and control, with keenness to choose what is cheaper in the short run for the benefit of the business. Any investments should be discouraged in the business unless absolutely necessary and work within the business’ means without stretching other critical business sectors.
Be it raising funds from own sources or elsewhere, bootstrapping remains the most convenient mode of capital facilitation in startups. But caution must be put into consideration when considering cost implications. It is therefore a challenge that would need strict business wisdom to tackle. Another point to note is the bootstrapped business has to develop a pipeline of paying customers and maintain them. This is because it’s only by revenues generated by the business that the firm is sustained over time.
With the limited financial resources available, effective marketing has always been a challenge. However, bootstrapping on marketing especially for startups can be achieved in the following ways:
- Increase sales via cross sales, where a client is allocated a minimum of several products.
- The use of social media for marketing – YouTube, Facebook and Instagram provide free platforms for doing advertising. With the power of connections, one can reach millions using a product page. And it is absolutely free!
- The use of customer referrals for new sales. Keep a database of all clients that you have sold products to. Engage them and if they are happy with the product, they do referrals to those connected to them. This is called networking.
It is therefore possible to start an enterprise without money. It has been seen even in West Africa where entrepreneurs landed big deals with big corporations without capital. As long as you get the product right, capitalization should never be a challenge! It therefore means what one needs to start a business is not capital per se, but a passion and the need the passion would fulfill.