Explain one means by which entrepreneurs can finance their business enterprises. Select one of the following: (1) bootstrap financing (2) obtaining capital from a bank or a similar financial institution (3) crowdfunding or (4) courting angel investors. Carefully define the means of financing you have selected. What are the benefits and drawbacks of the approach or method you have selected?
Solution
Introduction
Starting a business is a big challenge for entrepreneurs. It seems tough to raise capital a to start the business and meet the business objectives. In this modern business era, there are many ways for different entrepreneurs to finance the company. Based on the nature of the business, the management chooses the suitable method to initiate the business in an effective and lucrative manner. For the new venture development, the firm can select the bootstrap financing method.
Question
How entrepreneurs are using Bootstrap Financing to finance their business and take benefits regarding business efficiency and profitability?
Bootstrap Financing
Bootstrap Financing is a process of utilizing different opportunities to improve the business process without integrating external factor. The purpose is to reduce the cost of the business and invest the money in the new venture. The business improvements or new ways of work can help the company to save money, and it justifies the bootstrap financing. It protects the company from bank loans. The main preference of entrepreneurs is to use revenues, generated by the business and meet new business needs (Hacker & Hatemi-J, 2012).
Defining the Means of Bootstrap Financing
There are several ways, which can enhance the visibility of the bootstrap financing in the business. For Instance, the company can boost the Bootstrap Financing through limiting the scope of the product. Since starting the new venture, the company management can minimize the product features and specifications, which are unnecessary for customers. It cuts the cost, and it can be used in other new ventures (Nakhli & Belkacem, 2013).
Furthermore, the company management can tap into the accessible cash resources. Using and strengthen personal assets is a good approach for the business to generate money for the new venture. The entrepreneur raises less cash from outsiders, which makes the personal stake quite worthy of the company. Moreover, the entrepreneur has to find someone who wants to share the new venture. Co-founding the business is a big opportunity for the company to finance the business. Deriving the cash from multiple sources can reduce the burden (Neeley & Van Auken, 2009).
The venture management can have angel investors who want to do some big things in the future; the most important thing is to find them and convince them about the scope of the new venture. It will provide a big benefit to the business, as far as the financing process is concerned.
There are different sites, which can help the company to make the bootstrap financing visible. The pertinent example is Kick Starter website, which supports the creative ventures financially. Thus, involving key stakeholders from this site is good for an entrepreneur to make the difference (Neely & Van Auken, 2012).
Another example can be derived from the catering service. For Instance, Marriott hotel, a large hotel chain in the world, usually books several events to cater. The company management takes food from its suppliers and serves customers. After generating the revenue from these services, the company pays the amount of suppliers. However, the profit belongs to the company management, which indicates the success of the bootstrap financing. Having materials on the letter of credit is an opportunity for the business to start the venture and pay after certain revenue targets (Radovanov & Marcikić, 2017).
Benefits of Bootstrap Financing
Entrepreneurs do not have to spend much time on the investment. By improving the own business regarding efficiency, revenues can be generated quickly. Another big benefit that the entrepreneur can have is the complete control of the new venture. The role of outsiders in the investment is not visible in this process, and therefore, entrepreneurs own the business, finance, process, and profitability. Without funding, the company management can learn how to improve the business process and effectively utilize the money. It seems the continuous improvements to be efficient and lucrative, and it has emerged as benefits for entrepreneurs. Bootstrap financing supports the creativity in the company. Through creativity, the company can find ways to come up with different creative things at cheaper rates. In result, the company can become the priority of customers (Neeley & Van Auken, 2009).
Drawbacks of Bootstrap Financing
The big drawback of the bootstrap financing is its limitation. For Instance, Toyota, a big automobile company in the world, cannot enhance the visibility of the bootstrap finance due to huge investment needs. In the manufacturing and assembly lines, bootstrap finance cannot justify the large investments. Also, the big drawback is the time, as an organization can take much time to grow without any external investment. Interestingly, trends in the business are changing with the passage of the time, and it is not possible for the company to derive revenues through same business outputs (Nakhli & Belkacem, 2013).
Overall, despite containing some drawbacks, bootstrap is a good method for the business, as it seems less risky. It also makes the business attractive and creative, which can enable the long-term sustainability (Good & Wendy, 2014).
Conclusion
In the end, it is to conclude that Bootstrap finance is a good approach to finance the business. The evolvement of this approach with the passage of the time is important. Depending on the internal process improvements to raise the fund is beneficial for the company to start the new venture. The intensity of the drawbacks of bootstrap finance is lower than benefits. The most imprint thing is to be able to exploit different opportunities within the business to generate revenues and use in the new venture development. The new venture development can be successful if the bootstrap finance is successfully executed by the management.
References
Good, W. S., & Wendy, M. (2014). Building Your Dream: A Canadian Guide to Starting Your Own Business. McGraw-Hill.
Hacker, S., & Hatemi-J, A. (2012). A bootstrap test for causality with endogenous lag length choice: theory and application in finance. Journal of Economic Studies, 39(2), 144-160.
Nakhli, M. S., & Belkacem, L. (2013). Sources of momentum profits: bootstrap methods. Managerial Finance, 39(6), 607-619.
Neeley, L., & Van Auken, H. (2009). The Relationship Between Owner Characteristics and Use of Bootstrap Financing Methods. Journal of Small Business and Entrepreneurship, 22(4), 399-412,535-536.
Neely, L., & Van Auken, H. (2012). An Examination Of Small Firm Bootstrap Financing And Use Of Debt. Journal of Developmental Entrepreneurship, 17(1), 1.
Radovanov, B., & Marcikić, A. (2017). Bootstrap Testing Of Trading Strategies In Emerging Balkan Stock Markets. E+M Ekonomie a Management, 24(4), 103-119.
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