The pros and cons of bootstrapping your business
Bootstrapping is a term used to describe starting a small business with very little or virtually nothing – both financial and otherwise.
Bootstrappers usually rely on personal income and savings, sweat equity, the lowest possible operating costs, fast inventory turnaround, and a cash-only approach to selling.
“You’re using internal capabilities to run your business without using external help,” says Richard Angus, CEO of The Finance Team.
The Finance Team provides part-time financial executives to businesses.
Angus has more than 17 years experience in various businesses, 13 of them in the financial services industry. He answers some of the common questions around the bootstrapping concept.
Can you give us an example of how bootstrapping can work?
An example of how bootstrapping works would the ‘trade credit’ concept. If your business can find a vendor or supplier to extend trade credit and allow you to order goods on net 30 to 90 day terms, that is another form of bootstrap financing you could use. If your business is able to sell the goods before the payment is due, then you just generated cash flow without using any of your companies own cash.
Does bootstrapping affect the profitability or growth of a business?
If you use bootstrapping, it does slow down the growth of your business and thus slows down profitability. You are using creditors for 60 days and have until then to pay them back, whereas banks give you years to settle your credit.
Are more startups doing it in SA?
Bootstrapping is not a new concept and has been around for ages. However, after the global economic crisis, it has definitely become more popular for startups who can’t secure funding from formal lenders.
Do you know of any successful businesses that use the principles of bootstrapping?
Pick n Pay comes to mind but I wouldn’t use the term bootstrapping, instead they run the retail business on the principles of bootstrapping to promote growth, ie: supplier financing. For example, Pick n Pay buys flour from its provider and puts the flour on the shelf. The flour is sold and Pick n Pay has cash from the sale and only needs to pay the supplier in 30 – 60 days; that is exactly what bootstrapping is.
What advice do you have for entrepreneurs who are considering bootstrapping?
My advice to entrepreneurs is to plan a growth strategy carefully, and not to exceed it. Don’t grow faster than you can afford.