What bootstrapping is and 3 ways a small business can practice it right
Bootstrapping is a common term in the business world. However, for the sake of our green horn entrepreneurs, we look at what bootstrapping is, how it can help grow small businesses and how entrepreneurs can practice it right.
What does it mean to bootstrap your business?
Simply put, bootstrapping your business means you find ways of financing your company’s startup and growth with the assistance of or input from others instead of sourcing or borrowing raw cash. It involves stretching the resources you have, financial and otherwise as efficiently as possible in order to achieve as much as possible. Bootstrapping will also mostly involve spending your personal savings to get your business of the ground and running.
Why your business needs bootstrapping
At this point, most readers are saying “Oh, that’s it? I do that regularly”. True, most entrepreneurs, and Nigerians at large have practiced bootstrapping to a certain extent. However, bootstrapping in the business is important for several reasons. We will name the most obvious one.
Bootstrapping serves as one of most effective and inexpensive ways to ensure a business’ positive cash flow. There is no need to worry about cash loan repayments and the interests attached. In Nigeria, the present reluctance of banks to lend coupled with the high interest rates mean bootstrapping should be an option all small businesses consider.
Ways you can bootstrap your business
Trade credits are payment concessions suppliers grant their customers, allowing the business some time to make sales, from which the supplier can be repaid. Normally, suppliers extend credit to regular customers for 30, 60 or 90 days, without charging interest. Thus, this can serve as a viable alternative to having to take out loans. However, there are some kinks involved. For one, hardly would you meet a supplier who would be comfortable providing a first-time customer with trade credit.
In fact, most suppliers give only their long-time, tested and trusted customers such credits. Therefore, you have to spend time initially building up trust by paying promptly for goods bought. Secondly, trade credits cannot serve as a long-term bootstrapping option for a business. For one, trade credits mean that you are tied to certain suppliers and no longer have ready access to other, more competitive suppliers who might offer lower prices, a superior product, and/or more reliable deliveries. Furthermore, trade credits often mean that you forfeit other cost-cutting incentives such as discounts. These are issues to consider with trade credits.
Letters of credit
Another option is to use your customers to help source credits through the use of letters of credits. This is usually applicable in B2B scenarios, where a customer already pledged to make certain purchases from your business, writes such a letter to your supplier. Your supplier can take that letter as assurance that your sales and more importantly to him, revenue is already certified to a certain extent. Based on that assurance, your supplier can then release raw materials to you on credit without interest. However, this can only work in cases where your business has consistent customers who place steady supplies of your product or service.
Leasing is a good way to save money on capital expenditure (on items such as real estate, equipment, vehicles, furniture, computers) in order to have enough to cater to recurrent costs (such as salaries and sundry) that keep the business open. It involves making only payments for only that portion you use of such items.
For instance, instead of taking out millions to rent an office space for a year, options now exist to take co-working spaces where you pay for only the days or months you use the spaces. Leasing however depends on how well a negotiator you are. If you negotiate well, leasing can further improve your cash position by allowing for little or no down payment, reducing costs on maintenance and an option to buy for a certain price during or after the lease period. Thus, you have access to whatever prime piece of equipment you need without paying huge sums upfront.