What Is Bootstrap Financing: Benefits & Disadvantages of Bootstrapping

Pros And Cons of Bootstrap Financing

The term bootstrap financing explains various creative methods that are employed by any business venture to finance purchases without obtaining loans. Bootstrap financing methods allow concerned companies to depend to a lesser extent on banks and investors. Though bootstrap financing involves high risk for the company, it gives a sense of sheer freedom and control to the management of the company.

Bootstrap financing is generally opted by small business concerns.  Businesses which resource bootstraps finance do not approach any lender for obtaining loan. Instead, they essentially get in touch with vendors for their purchases and assure to pay them in future. Bootstrap financing generally requires a business to possess letters of credit that are similar to IOUs.

You must be aware of the pros and cons of bootstrap financing if you want to initiate a small business venture depending on bootstrap financing.

Benefits of Bootstrap Financing

Bootstrap financing involves several benefits. Most important aspect of this type of financing is that it reduces dependence on banks and lenders. Founders of businesses who adopt bootstrap financing methods are able to steer their business with absolute command and sheer freedom. Other aspect of bootstrap financing is that it does not require businesses to pay interest due to non-involvement of any loan. For this reason, it is also termed as the cheapest method of raising business capital.

Disadvantages of Bootstrap Financing

Bootstrap financing is also known to put companies in troubled water, in a given situation. The most prominent disadvantage of bootstrap financing is that it operates without money funded from outside or lenders. So, in absence of any alternate income resource, companies find it very tough to sustain. According to a study conducted by SBA (Small Business Administration), about 33% of all the newly set up companies that venture with bootstrap financing stumble.

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