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Class 6
12 March 2018
Timmons Model of the Entrepreneurial
Importance of Fit & Balance
Bootstrapping Strategies
• Finance your company's start up and growth with the
assistance of or input from others .
• Stretching resources : Financial & otherwise as far as they can
• Multistage commitment of resources with a
– minimum commitment at each stage or decision point
– “Lack of resources can be a big advantage – because it forces the boot
strapper to concentrate on selling to bring cash into the business”
• Using Other People Resources
– Obtaining the use of other people resources, particularly in the
startup and early growth stages of a venture is important. Other
people resource can include :
– “money invested or lent by friends or people space or equipment
loaned, material loaned free by suppliers or accounts payable etc”
Bootstrapping methods
1. Trade credit
• Normally, suppliers extend credit to regular customers
for 30, 60 or 90 days, without charging interest.
• However, when you first start your business, suppliers
will want every order COD (cash or check on delivery)
until you've established that you can pay your bills on
• While this is a fairly normal practice, in order to raise
money during start up, you're going to have to try to
negotiate a trade credit basis with suppliers.
• One of the things that will help you in these
negotiations is having a written financial plan.
Problems with trade credit ..
• Your may become committed to those suppliers
– Hence access to more competitive suppliers who might offer
lower prices, a superior product, and/or more reliable deliveries
will be limited
• Cost of trade credit can be high
– E.g. the terms the supplier offers are 3 percent cash discount
within 15 days and a net date of 30 days.
– Essentially, the supplier is saying that if you pay within 15 days,
the purchase price will be discounted by 3 percent. On the other
hand, by forfeiting the 3-percent discount, you're able to use
your money for 15 more days, and it will only cost you that 3-
percent discount.
2. Factoring
• It involves selling your receivables to a buyer, such as
a commercial finance company, to raise capital
– It is very common in industries, such as the clothing
industry, where long receivables are part of the business
• Factors usually buy accounts receivable at a rate that
ranges between 75 and 90 percent of face value, and
then add a discount rate of between 2 and 6 percent.
– The factor assumes the risk, and task, of collecting the
receivables. If your prices are set up to take factoring into
account, you can still make a profit.
Customer credit

• Customers can write letter of credit

• If a large corporation has placed orders for
your product
– You can obtain letter of credit from your customer
and then place order for raw materials using this
letter of credit as security
Buying a facility with ballooning repayments

• Loan on the facility can be structured to make use

of your growth & seasonal peaks
• You can arrange for a graduated payment mortgage
– Very small monthly payments with the cost increasing
over the lifetime of the loan.
– The lower monthly payments give your business time to
– Eventually, you can refinance the loan when time and
interest rates permit.
• Real estate appreciates over time and then you can
borrow against this
Paying in installments
• Lot of capex spending in the initial stages of
your business means that
– you may find yourself without enough working
capital to keep your business going
– Instead if you pay in installments you can conserve
working capital and use the equipment in your
Types of credit contracts used to purchase
• Conditional sales contract
– The purchaser doesn't receive title to the
equipment until it's fully paid for.
• The Chattel-mortgage contract
– The equipment becomes the property of the
purchaser on delivery, but the seller holds a
mortgage claim against it until the amount
specified in the contract is paid.
• Leasing is another way to avoid financing the entire
purchase of high-ticket items like equipment,
vehicles, furniture, computers etc
– With leasing, you pay for only that portion you use, rather
than for the entire purchase price.
– You can lease computers or photocopiers ..
– Ensure that maintenance costs are built into the lease
package, thereby reducing your cash outlays
– Purchase option to buy the property after the lease period
has ended
– Tie it to indices that track interest rates to create an
adjustable lease
Summary : Bootstrap financing
• Begins and ends with careful attention to
• Keep overheads low. Be aware of what you
• Don’t choose an expensive office unless you
can afford
– Use secondhand furniture if available
• Keep a close watch on operating expenses
Bootstrapping is not for everyone though !

• Raising the right

money at the right
time can
transform a
company’s growth
The roots of competitive advantage