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ENTREPRENERUS AND BOOTSTRAP FINANCE

Dr. Lynn Neeley, Professor Management Department, Northern Illinois University

DeKalb, Illinois

Many entrepreneurs have used a variety of bootstrap financing methods to satisfy their ventures’ resource needs. These techniques, which may be a combination of social or economic transactions, have included purchasing used rather than new equipment, getting the “best” possible terms from suppliers, forgoing salary withdrawals from the business, bartering for goods and services, and sharing equipment with other businesses, to name only a few options. In the last few years, some scholars have begun to explore this important set of activities, bootstrap finance. The purposes of this paper are to examine bootstrap finance in its context, to show some of the techniques for and sources of bootstrapping, and to demonstrate recent use of these techniques in the United States.

Introduction

Financial resources have been one of the important aspects of the start-up or continuing operations of most enterprises (Brush, et al., 2001; Carter, Gartner, et al., 1996). Whether funding needs have been small or quite large, entrepreneurs have exploited a variety of financial sources and used many different techniques, including bootstrap financing (Bhide, 1992; Bruno and Tyebjee, 1985; Camp and Sexton, 1992; Harrison and Mason, 1997; Stevenson, et al., 1985). Bootstrap financing is a variety of alternative routes that owners can take to meet businesses’ financial needs without traditional institutional commitments or market obligations (Bhide, 1992; Freear, et al., 1995; Shulman, 1994; Winborg and Landstrom, 2001). These practices may demonstrate some aspects of social transactions through negotiating, coopting, sharing, or borrowing (Starr and MacMillan, 1990).

Scholars have published definitions of bootstrap finance that have exhibited some

of those diverse approaches and have agreed that bootstrapping financiers avoid long-term borrowing and long-term contractual commitments and that they hesitate to issue stock to raise capital—entrepreneurs “buy capital” rather than “sell stock” (Wetzel, 1983). Instead, bootstrap financing is a variety of ingenious methods that find resources, maximize their efficient use, and minimize the explicit costs associated with using these means whether they are found inside the business, obtained from other people, or provided by other companies and organizations (Bhide, 1992; Freear, et al., 1995; Wetzel, 1983; Winborg and Landstrom, 2001). Bootstrap finance methods encourage businesses owners to exploit personal resources, to utilize personal short-term borrowing, to request funding from relatives, to barter for services, to acquire money through quasi-

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equity arrangements, to cooperate for better customer access, to negotiate for client-based funds, to manage assets effectively, to lease equipment, to outsource production, and to seek subsidies or incentives or grants (Bhide, 1992; Bhide, 2000; McMahon and Holmes, 1991; Stevenson, et al., 1985; Winborg and Landstrom, 2001). Many of the approaches in the preceding list have been and are used by the largest corporations in the world to enhance the productivity of their resources; however, the focus here is on the benefits that bootstrap finance has provided to entrepreneurs who aimed to start, expand, or maintain a fiscally healthy business.

Bootstrap finance techniques have shown some outstanding results among start-ups that have grown into large and well-known companies. A few spectacular examples of successful bootstrap financing among United States companies launched with modest initial resources are Roadway Express, Clorox, Lillian Vernon, The Limited, Black and Decker, E. & J. Gallo Winery, Gateway 2000, Coca Cola, Dell, Eastman Kodak, UPS, Walgreens, and Hewlett-Packard (Hofman, 1997). Some of these companies’ stories are almost tributes to entrepreneurs who have used bootstrapping effectively. Each of three men put $800 into the launch of Roadway Express, which has grown into a multi-billion dollar business. Lillian Vernon took $2,000 that she and her husband had received as wedding gifts to start her business career; the Lillian Vernon Corporation has become a multi-million dollar company. In 1933, two brothers, who had no commercial or winemaking experience, used $923 from their savings and borrowed $5,000 to open Gallo Wines. The Hewlett-Packard Company began with $523 in 1938 and then won its first customer, Walt Disney, who needed sound equipment (Hofman, 1997). Although the ultimate outcomes of bootstrapped start-ups for these highly visible companies have been exciting, many enterprises have quietly used bootstrap finance sources of funding and techniques to provide the resources that have maintained and expanded their operations.

The purposes of this paper are to examine the concept of and context for bootstrapping and to look at bootstrap finance in practice. The first section examines several different definitions of bootstrap financing as it has been presented in scholarly research. The second section places bootstrap finance in context by showing the development of some of the issues involved, by discussing a few of the ways in which entrepreneurs’ preferences have influenced those techniques, and by describing some of the additional complexity found in new and growing enterprises’ resource decisions in comparison with large firms’ decisions. An overview of bootstrap finance techniques and sources is provided in the third section. The fourth section shows the results of a recent poll of United States entrepreneurs in regard to their use of bootstrap finance.

The Bootstrap Financing Concept

Although the word “bootstrap” was not used in their writing, the idea of acquiring or exploiting resources through social transactions rather than economic transactions and the concept of getting needed resources at lower costs with social transactions was put forward by Starr and MacMillan (1990). These authors looked at social contracts made

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in order to possess or borrow or co-opt tangible and intangible assets as a strategy that has been quite well suited for entrepreneurs to employ in resource-constrained start-up organizations. The business owner’s needed support was secured by social assets, which included obligation, trust, gratitude, liking, and friendship, rather than monetary payments.

In the early 1990s, scholars began to name bootstrap finance explicitly and to

recognize this combination of resource acquisition methods as a distinct realm for their attention and inquiry. Over the last few years several definitions have been published, but the first pointed reference appeared in the Harvard Business Review. In his article that christened the field for scholars, Bhide (1992) focused on bootstrapping in the earlier stages and defined it as “launching ventures with modest personal funds.” On the basis of extensive interviews with a large number of accomplished entrepreneurs, he reported valuable descriptive data supporting the widespread practice of bootstrap finance. He asserted that in situations involving entrepreneurs and venture capitalists it was possible or even probable that there were: (a) a poor fit of objectives, (b) hidden costs of venture capitalists’ money, (c) strategy conflicts, and (d) reduced flexibility. Given these situations, bootstrap finance methods could have been quite attractive to entrepreneurs.

Freear, Sohl, and Wetzel (1995) expanded the idea of bootstrap financing to use

in firms’ rapid growth stages, rather than exclusively in the earliest stages of an enterprise’s life, and broadened the types of resources that might be exploited to include other options. Their concept of bootstrapping was, “highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources,” such as business alliances. These authors reported the importance of bootstrapping and forming alliances as strategies to gaining resources necessary for the survival of the newer ventures studied. Van Auken and Neeley (1996) interpreted nontraditional sources as those that would not have appeared within the institutional financial markets, and they explicitly added the sale of the entrepreneurs’ personal properties, and personal indebtedness to the mix of bootstrap methods employed by business owners. In 1997, Harrison and Mason replicated the Freear, et al. research and found that 95% of the firms they studied had used bootstrap financial methods to varying degrees, and they contrasted the use of bootstrap techniques and business alliances between two groups of entrepreneurs in the same industry but geographically distant from each other. Although some differences in the frequency of use were shown, the bootstrap methods and entrepreneurs’ preference were similar for the two groups, one in Ireland and the other in the United States. The importance of businesses’ owners having exploited the value of their personal residence, put forward by Dennis (1998), augmented the possibilities for bootstrap finance techniques.

More recently, Winborg and Lanstrom (2001) refined the language of bootstrapping and further explored the lengths to which entrepreneurs had gone to obtain the wherewithal to operate businesses. Their premise was that bootstrapping fulfilled the “need for resources without . . . a financial transaction.” Winborg and Lanstrom added forgone salary or salaries from other employment, jointly controlled assets, several forms of cash or asset management, and governmental subsidies to their analysis. They used a

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comprehensive list of bootstrapping techniques as the basis for identifying six different groups of bootstrappers, who were distinguished by their orientation toward methods of resource acquisition. Those methods were characterized as an internal mode, a social mode, and a quasi-market mode; preferences for these methods were found among the bootstrap entrepreneurs. The findings were that (a) delaying bootstappers, private owner-financed bootstrappers, and minimizing bootstrappers relied upon the internal method of resource acquisition; (b) relationship-oriented bootstrappers preferred to use a socially oriented method of resource acquisition; and (c) subsidy-oriented bootstrappers applied quasi-market oriented methods. A sixth group of entrepreneurs had not used any bootstrapping techniques to meet the needs of their businesses. Winborg and Landstrom suggested that financial bootstrapping was probably a widely occurring, contextually based phenomenon and merited more study. They went on to observe that a focus on institutional or external market finance as a solution for smaller or newer businesses could be misplaced. They contended that resources gained through bootstrap finance methods could meet such businesses’ needs more appropriately in many situations.

Clearly, scholars have shown that bootstrap financing has encompassed a variety of resourceful methods to find monies or other resources, to maximize those assets’ value, and to minimize the explicit costs associated with using monies or other capital “found” inside the business, obtained from other people, or provided by other companies (Bhide, 1992; Freear, et al., 1995; Harrison and Mason, 1997; Stevenson, et al., 1985; Winborg and Landstrom, 2001). These authors have brought a great number of techniques to the discussion of bootstrap finance, and some additional routes for the entrepreneur to acquire resources for a business could be considered. Quasi-equity, outsourcing, and foundation grants could be added to the blend of bootstrap financing methods that are reflective of practice and consistent with ownership preservation and avoidance of long-term debt obligations. Even though some ownership interest may have changed hands, the quasi-equity was not actively traded, was held by one or a few individuals other than the entrepreneur, and was not sold with an initial public offering as an ultimate objective (Ang, 1992; Wetzel, 1983). Quasi-equity includes limited partnerships, individual or group angels, adventure capitalists, and equity interests traded to incubators and credit enhancements within this paper’s boundaries (Ang, 1992; Arkebauer, 1993; Blechman and Levinson, 1991; Freear and Wetzel, 1990; Schell, 1996; “Start-up Nation 21,” 2001; Wetzel, 1983). A discussion of quasi-equity, outsourcing, and foundation grants appears in a later section.

It may be constructive to consider bootstrap financing’s scholarly context before

examining several of the options that entrepreneurs have had at their disposal. Bootstrap finance emerged from traditional corporate finance activities and literature through scholars’ works contrasting what they had found as common practices in larger versus small businesses. Not surprisingly, the language used and the financial practices at issue among the earlier studies had an institutional finance orientation. Distinct differences between the two size-defined groups of businesses were clear, and schlars sought to explain them. Finance with an entrepreneurial bent, and bootstrap financing especially, developed partially as a result of those explanations. Some of the elements of bootstrap

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financing, modified from the traditional large corporate or organized markets perspective to fit a more characteristic entrepreneurial setting, follow.

The Context of Bootstrap Finance Methods Entrepreneurial finance began to appear in the scholarly literature as if it were

occurring in the same context as corporate, or institutionally oriented, finance. Much of the language or terminology and many of the fundamental financial issues initially studied were identical to those that had been found in research based on the Fortune 500 (Grablowsky, 1978; Walker and Petty, 1978). Some of these issues or common practices were working capital management, capital budgeting, financial leverage, dividend policy, and capital structure. But the framework within which these financial issues have existed for entrepreneurs has been a richer and more complex model because of the entrepreneur’s personal preferences and constraints, which can modify their financial decision-making (Ang, 1992; Busenitz and Barney, 1997; Cooper, et al., 1989; Landstrom and Winborg, 1995). An overview of the conventional terminology, financial issues, and the greater complexity inherent in an entrepreneurial setting for finance-related decisions follows.

Similar Language and Financial Management Issues The scholarly literature of entrepreneurial finance grew from an institutionally

oriented corporate finance origin. Not surprisingly, researchers began their inquiries in this field by using the same language and structured questions regarding similar financial management issues for entrepreneurs as they had in the traditional institutional financial literature.

Similar Language

During the later 1970s and early 1980s, articles began to be published that were

focused on the distinct financial practices of “small firms” or “small businesses,” the common terms used at that time for what would probably be known now as new ventures, entrepreneurships, or family businesses. The publications depended upon generally accepted language to specify issues that the businesses’ owners and founders would have dealt with (Cooley and Edwards, 1983; Cooley and Pullen, 1979; Edwards, et al., 1979; Grablowsky, 1978; Walker and Petty, 1978). Terms such as cash management, accruals, financial leverage, dividend policy, working capital management, and financial objectives were used as standard practice in the earlier works. That choice of words painted clear pictures for those persons trained in traditional corporate finance, but some of the phrases may have been strange to entrepreneurs, the subjects of the research, and to many others who were studying entrepreneurs at that time. Entrepreneurs were much more likely to use the lexicon of the popular press to communicate their financial status, needs, and objectives. Nonetheless, many entrepreneurs have made decisions about and acted upon the issues that the phrases represented.

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Similar Financial Issues

Although the financial issues may have been discussed in terms that seemed

somewhat erudite in comparison with a business owner’s normal language, quite a number of the entrepreneurs’ interests have been similar to those found in the corporate setting and the literature describing corporate interests. Some of the issues or needs, common between large companies and entrepreneurships, have been working capital management, capital budgeting, capital structure, leverage, and dividend policy.

In early scholarly work on entrepreneurial finance, researchers examined the

disposition of financial assets in new and small ventures by comparing them with standard capital management practices that had been observed in large, long-established firms (Cooley and Pullen, 1979; Grablowsky, 1978; Pettit and Singer, 1985; Walker and Petty, 1978). Scholars found differences among the financial practices that small firms or businesses had chosen for cash management, e.g., methods such as delayed payments to vendors, accelerated receipts from customers, and short-term investments of cash and cash equivalents and securities.

Generally, the studies reported that entrepreneurs had not realized the full benefits

from financial assets they controlled, that working capital shortages seemed to be a chronic problem, and that smaller or newer firms’ working capital positions were not as strong as those observed in larger businesses (Grablowsky, 1978; Pettit and Singer, 1985; Walker and Petty, 1978). Researchers found that small business owners controlled cash inflows and outflows, sped income, and slowed outgo better and more often than they controlled cash budgeting, which most firms had not done, and temporary investing, which most had used but by way of safe low-yield accounts (Cooley and Pullen, 1979). Several possible rationales were offered for what researchers characterized as under-performing management strategies or tactics. Scholars postulated that circumstances particular to smaller ventures’ conditions could have resulted from restrictions on the use of cash management techniques. These included the firms not employing highly educated financial managers, the lack of recognition that cash management problems existed, and the managers not knowing the methods that might have been available to solve the problems if they were recognized (Cooley and Pullen, 1979; Grablowsky, 1978).

Viewing the entrepreneurs’ businesses globally might have revealed that the lack

of liquidity or working capital had been caused by a general scarcity of slack resources—little time, knowledge, or training (Ang, 1992). Frequently entrepreneurships have had no spare, or slack, resources, particularly in the start-up stages. Logically extended, the liquidity problem’s source, general resource scarcity, could have supported an entrepreneurial finance theory that would have been adjusted by the stage of development of the venture (Ang, 1992). Some authors posited that working capital shortages could have been related to managers’ willingness or unwillingness to take risk (Walker and Petty, 1978) or to time constraints (Cooley and Pullen, 1979). Other observers of the same trends and tendencies offered the possible explanation that the owner/managers of smaller or newer businesses had not used available financial or accounting reports so that

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they had not been fully aware of their financial status or resource options. Owner/managers not having used available reports also was a reason put forward to explain why capital budgeting had not been used (McMahon and Holmes, 1991).

Capital structure, leverage, and dividend policy were concepts brought to

entrepreneurial finance directly from the large corporations, and researchers reported observed circumstances and possible explanations consistent with the institutional finance point of view (Pettit and Singer, 1985; Walker and Petty, 1978). Through many years entrepreneurial ventures have consistently been more debt-oriented and have had a higher proportion of long-term debt than equity in their capital structure configurations; those ventures have carried more short-term debt proportionally on their financial statements than would have been seen among the liabilities of long-established firms (Chaganti, et al., 1995; Osteryoung, et al., 1992; Walker and Petty, 1978). Scholars gave several seemingly unrelated possible causes for entrepreneurs’ choices between long-term debt and equity. One theory was that a new or small venture’s optimal debt and equity mix in the businesses’ capital structures could have been a function of the nature of the firm and the entrepreneur’s preferences between shared ownership through equity sales, and increased legal liability from formal indebtedness (Pettit and Singer, 1985). An additional insight was that entrepreneurs may have seen equity as a “window” of opportunity rather than as part of a far-reaching plan to obtain a desired financial structure. In other words, a smaller firm’s capital structure was more a function of informed opportunistic behavior than of careful planning (Norton, 1991). These entrepreneurial behaviors and decisions in regard to capital structure were also characterized as having adapted to an unfolding situation, or “muddling through” (Landstrom and Winborg, 1995). Another observation regarding capital structure was tied closely with dividend policy, an important consideration among large, publicly traded companies. The founder or business owner, the entrepreneur, may have chosen to build the equity capital of the venture by paying negative dividends, i.e., contributing additional owner’s equity. Another point regarding dividend policy was that, although dividends could have been one component of the compensation to owners or managers, the entrepreneurs’ decisions might have been to forgo taking any dividends to avoid draining capital from the business (Ang, 1991). Clearly, scholars provided many different explanations for the observed tendencies, but the rationales were related to preferences on points such as ownership, risk, opportunism, adaptability, and compensation.

Some scholars contend that financial activity is the application of classical

economic theory. This may be true for institutional finance, and it may be equally true for bootstrap financial activity. But caution might be well advised as one examines the underlying assumptions within different schools of economic thought and matches those assumptions to the context of bootstrap finance research. Agency theory, the rational economic man, profit maximization, and other presumed motivators and behaviors that have been the assumptive foundations of much economic and financial theory and research may not be valid for the entrepreneur’s situation. Some scholars have asserted that the traditional financial perspective and the bootstrap financial outlook may have differing objectives that could result in conflicts between the two groups (Bhide, 1992;

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Bhide, 2000). Alternative models of economic behavior, such as the Austrian school of thought, may be a more appropriate basis for analysis (Ang, 1991; Gibson, 1992). It may also be important to make provisions for the roles, which social relationships and social skills have had in helping entrepreneurs gain access to the resources that they and their businesses have needed (Starr and MacMillan, 1990; Vesper, 1990).

Many questions remain to be tested within the field of bootstrap finance that

could have a relatively quick application. Situational modifying factors, such as life-cycle stage, industrial classification, business location, and growth prospects, may have strongly influenced the levels of or choices among the bootstrapping techniques used. Research on the relationships within families, both nuclear and extended, could be productive because of nature of some of the bootstrappers’ techniques. This would especially be true for issues that would include concepts such as social capital, social contracting, and trust’s being pivotal for understanding and implementing some forms of bootstrap financing (Winborg and Landstrom, 2001). Insight into these and other related topics could improve the function of entrepreneurial ventures.

Although the beginnings of the research into financial practices in entrepreneurial

firms were based on the large corporations’ institutional finance model, scholars acknowledged that a number of additional decision parameters existed for new or smaller ventures. A greater variety and number of considerations were necessary to understand entrepreneurial finances in comparison with corporate finances (Vos, 1992).

Enriched Framework

Entrepreneurs’ financial practices have existed in a richer, more complex decision space than the one in which larger or more mature organizations have dealt with financial issues. A variety of modifying factors have affected financial decisions and actions; among these factors have been the owners’ preferences and objectives and additional constraints relating to a new or small venture (Ang, 1992; Landstrom and Winborg, 1997).

Owner Financial Preferences

In this section the words “preference,” “attitude,” “objective,” and “importance” have been used almost interchangeably in the discussion of research findings on tendencies noted in entrepreneurs’ behaviors. Often the entrepreneur not only has been the owner but also has acted as the manager of a new or small venture. His or her personal priorities, preferences, likes, and dislikes have been evident in the decisions made regarding the business (Bird, 1989). One of the owners’ attitudes or preferences, their disposition toward risk, has been explored for more than 20 years (Brockhaus, 1980). Personal risk preferences have loomed large in entrepreneurs’ decision making regarding many aspects of their businesses, especially financial issues (Ang, 1991; Romano, et al., 2001; Walker and Petty, 1978). Some scholars have contended that managers’ attitudes, especially their willingness to assume risk, have shaped the complete

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financial profiles of their businesses (Walker and Petty, 1978). Attitudes toward risk have clearly had an effect on a variety of financial issues, especially those pertaining to external sources of funds requiring explicit financial transactions and commitments (Ang, 1991; Landstrom and Winborg, 1995; Walker and Petty, 1978).

Entrepreneurs have consistently expressed strong preferences for internal funding

rather than external equity or debt (Kuratko, et al., 1997; Norton, 1991;Van Auken and Carter, 1989). But modifying factors may have shaped business owners’ decisions. The levels of capital investments necessary to manage businesses effectively in some industry segments may also have influenced entrepreneurs’ preferences for internal funding (Hubbard, et al., 1995). If the entrepreneur needed external funding, additional debt has been preferred over equity loss to expand the resource base unless the situation required capital from equity as well. One view of this behavior has been that entrepreneurs and business managers implicitly expressed a sort or “pecking order” in the selection of different external funding possibilities (Myers, 1984). Another interpretation has been that entrepreneurs have adapted to the demands of the situation, and they have prioritized their favored methods of meeting their businesses’ needs (Landstrom and Winborg, 1995).

The financial objectives that entrepreneurs established for their businesses have

not been the same as those that have been observed among larger or older organizations. Net income, net income growth, and the uncertainty of future incomes have been paramount among entrepreneurs’ financial concerns rather than wealth maximization, which might have been expected as the goal for large firms (Amit et al., 2001). A related research finding was that the tax deductibility of interest expenses was not a significant motivator for small business’ owners who had chosen to pursue finding external funding (Cooley and Edwards, 1983). Norton (1991) modeled entrepreneurs’ managerial objectives, i.e., career independence and wealth accumulation, as they were reflected in two sets of entrepreneurs’ preferences. His two-by-two model represented the owners’ primary business objective on one axis that depicted wealth and control and owners’ desired or targeted growth as rapid or stable on the other axis. One of the conclusions of Norton’s research was that entrepreneurs’ financial decisions needed to be interpreted within the context of their personal objective functions or desires. Another interesting finding was that non-entrepreneurs have perceived entrepreneurs’ financial objectives erroneously. Non-entrepreneurs had specified that wealth attainment was the most important objective among newer ventures’ owners. When entrepreneurs were polled, wealth attainment was not the exclusive or primary determinant in their decision-making; other values or beliefs, such as innovation and independence, were more important (Amit et al., 2001).

Generally, these results supported earlier researchers’ findings that an optimal

debt and equity structure for an entrepreneurial venture might have been a function of the manager’s preferences, not purely economic interests or motivators (Pettit and Singer, 1985). The capital structure of family-owned businesses, particularly, illustrated the importance of owners’ preferences among types of capital and how capital was acquired. Risk aversion and retention of ownership and control seem to have been prominent in

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owner-managers’ decision-making processes, which could have accentuated the constraining factors involved in financial decisions. A varied array of behavioral and social elements may have impinged on these firms’ financial decisions, at least partially, because of added complexity in the context for resolving capital needs (Romano, et al., 2001). Decision-making Constraints

The context in which entrepreneurs function has clearly been a rich and complex

one, with more constraints, such as estate taxes, intergenerational transfers, personal liability, and shorter organizational life expectancies, for new ventures (Ang, 1992). Among the considerations that would not have been part of large corporate financial decision-making have been social obligations, the integration of personal and business assets, and a variety of other circumstances peculiar for entrepreneurships. These types of additional factors have most likely affected resource acquisition decisions made within entrepreneurial firms.

Interpersonal communication and assurances to unrelated persons and family

members, not shareholders, may have affected owners’ actions greatly, especially because the majority were probably two-party transactions, one-on-one or face-to-face (Ang, 1992). Entrepreneurs have routinely weighed the impact of inheritance disputes or intergenerational business expectations, in addition to financial or economic factors, when choosing among alternative solutions (Ang, 1992; Pettit and Singer, 1985). Others have contended that owner-managers’ financial decision-making processes have been complicated by an array of explicitly social and behavioral factors affecting those outcomes (Romano, et al., 2001). More perplexing factors have entered the enterprise’s financial equation because of a prevalence of implicit rather than explicit contracts, a shorter—than that of a publicly held corporation—life expectancy for the enterprise, and the prevalence of socially rather than economically based transactions (Ang, 1992; Starr and MacMillan, 1990).

Additional complicating factors have also persisted owing to the lack of

boundaries between personal legal or financial obligations and the venture’s legal or financial liabilities. Frequently personal and business accounts have been integrated, and personal liability has overhung commitments that had been made for the business (Ang, 1991; Ang, 1992). Early on, scholars recognized that some decision-making tools, such as leverage analysis, were not appropriate without modifications for smaller firms. Situations that have been common among small firms, similar to restrictive loan covenants or required personal endorsements, necessitated modifications in the analysis model so that it would be better suited to account for more complexity in the decision-making process (Edwards, et al., 1979; Gartner, et al., 1992).

Entrepreneurs have developed numerous ways to cope with the “different types of

complexities” that they have dealt with in their businesses (Ang, 1992). One of those methods has been the use of biases and heuristics in decision-making, which have been effective in complex and uncertain conditions (Busenitz and Barney, 1997). Biases and

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rules-of-thumb have served entrepreneurs well, given the complicated and dynamic environment within which they make decisions. Often quick decisions have been necessary to avoid missing great opportunities, and this has meant there was not time to make thoughtful and cautious decisions, the kind expected in large corporate settings. Results showed that entrepreneurs did employ biases and heuristics, a departure from the practices managers have used in large organizations and that the two groups of managers think differently. An extension of the differences between entrepreneurs and organizational managers might have been seen in the variety of methods chosen to meet financial necessity. The added complexity, richness, and demands of an entrepreneurial environment might have given business persons the inspiration needed to explore more unconventional financing alternatives.

Scholarship supports the ideas, seen in practice, that entrepreneurs have chosen financial resources and techniques, some of which have been different from the institutional or corporate model, to establish, maintain and expand their businesses. Entrepreneurs have satisfied their financial needs just as any large corporation would; however, additional resources, some of which would be alien to an institutional finance realm, have been tapped. These owners’ decisions might have been modified by their personal preferences and the greater complexity of the decision-making environment. They have preferred to use financial options and techniques that have avoided formal financial obligations and by doing so have sought to maintain their ownership interests. As a result, bootstrap financing has covered a spectrum of financial options for business owners that have met these criteria. In the next section of this paper, an extensive list of bootstrapping techniques is given.

Sources and Techniques for Bootstrapped Finance Bootstrap financing is a set of methods used to meet a venture’s resource needs

while avoiding formal financial transactions. A bootstrap financier would eschew forms of external debt, especially long-term debt, and would also preserve ownership interest by not selling or trading the equity in the business. For the purposes of this study, categories of bootstrap financing include personal resources, personal short-term borrowing, funding from relations, barter, quasi-equity arrangements, cooperative assets, client-based funds, asset or cash management, leases, outsourcing, subsidies or incentives, and foundation grants (Ang, 1992; Bhide, 1992; Blum, 1995; Dennis, 1998; Freear, et al., 1995; Harrison and Mason, 1997; McMahon and Holmes, 1991; Stevenson, et al., 1985; Van Auken and Neeley, 1996; Wetzel, 1983; Winborg and Landstrom, 2001). Each of the preceding categories of techniques and some of the sources are described briefly. (See also Table I.)

The Owner’s Financial and Real Assets

The majority of ventures that have been initiated in the United States started with the owner’s financial and/or real assets serving as a large component of the long-term and

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working capital in the business (Bhide, 1992; Bhide, 2000). Clearly, those sources of financing have exposed entrepreneurs to the potential of great personal loss, but they have maintained control and ownership of the companies in return for bearing that risk. Almost any assets that can be owned and controlled by individuals have been used within this category of possible funding options.

Personal savings accounts have provided the initial funds for many young

companies, as have other highly fungible assets such as securities (Bhide, 1992; Van Auken and Neeley, 1996). The types of securities that nascent and active business owners have transformed into cash quickly to pursue their ventures have been preferred or common stocks, corporate or municipal bonds, and certificates of deposit (Blechman and Levinson, 1991; Caggiano, 2001; Stevenson, et al., 1985; Winberg and Landstrom, 2001). Entrepreneurs have sold real or personal property or, sometimes, integrated those assets directly into the businesses’ operations (Van Auken and Neeley, 1996; Whittemore, 1993). Especially during the start-up or earlier stages of a venture’s launch, some business owners will forgo any personal salary (Winborg and Landstrom, 2001). Not surprisingly, those entrepreneurs who have chosen not to withdraw a salary from their new businesses have often relied on their income from other jobs that they held while getting operations off the ground (Winborg and Landstrom, 2001). Some may also have depended on the salaries of supportive spouses or partners (DeLuca, 1998). Another way that many business owners have managed to launch firms has been by using their homes as the opening base of operations (Finegan, 1995; Fenn, 1999; Landstrom and Winborg, 1997). All these methods have focused on the actual use of personal resources or converting those directly to cash for the benefit of the venture. But the entrepreneurs have also exploited their financial capacity through lending obligations.

The Entrepreneur’s Personal Borrowing

Personal borrowing has served as another mainstay to initiate or operate in the early stages of newer enterprises (Blechman and Levinson, 1991; Van Auken and Neeley, 1996). One of the many reasons for this has been that the distinctions between personal and business assets have been characterized by some vagueness, particularly with proprietorship or partnership as a legal form of business (Ang, 1991). Banks and other lenders have not recognized most new businesses as unique entities because many or most new ventures have not been formed as corporations, the only business forms that have been recognized as unique entities. In the banker’s eyes, most entrepreneurial ventures have been the same entity as the owner, or a set of partners as individuals, or a family unit, and not a self-contained business. From this perspective, it has been logical that new business owners have used their personal borrowing capacity to finance their firms, although increased personal liability has accompanied each loan. Just as with other loans to individuals, the time for repaying the debt has often been short, one year or less. This brief time span has been rather consistent and somewhat independent of the expected life of any asset that might have been pledged to back the loan, although the term of collateralized loans may have been extended through a five-year repayment period.

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Installment Loans, Lines of Credit, Signature Loans, and Credit Cards

Personal obligations made to open or sustain a business have taken the form of

installment loans at commercial banks; personal lines of credit at commercial banks; signature or personal loans from commercial banks, credit unions, or savings and loan companies; and personal credit cards. These are set apart for the purposes of this discussion because the ventures have been altogether invisible to lenders when entrepreneurs accept borrowing obligations such as these. Installment loans taken with commercial banks have been clear extensions of personal borrowing capacity in the case of proprietorships or partnerships (Prentice Hall, 1993; Timmons, et al., 1985). Normally these loans have been a relatively modest size (Fraser, 2001; Hise, 1998; Schell, 1996; Van Auken and Neeley, 1996). Entrepreneurs who have developed a close working relationship with bank personnel have had greater success with such loans because of the improved flow of information between the businesses and the loan officers (Binks and Ennew, 1996). Another opportunity afforded to ventures’ founders by the commercial banking system has been the extension of personal lines of credit, which have offered enhanced convenience, flexibility, and economy to businesses (Brown, 1994; Stevenson, et al., 1985; Timmons, et al., 1985). Entrepreneurs have also secured personal or signature loans through commercial banks, finance companies, or savings and loan associations, although this lending vehicle has not been offered frequently in all parts of the nation (Arkebauer, 1993; Bird, 1989; Prentice Hall, 1993; Stevenson, et al., 1985).

Credit cards have become widely used by people with fledgling businesses as

methods for enlarging their base of working capital (Bhide, 1992; Finegan, 1995; Fraser, 1999; Hise, 1998; Schell, 1996; Whittemore, 1993). In a 1997 survey, the top two methods of financing for small companies were bank loans and credit cards, which were used by 38% and 34% of the respondents, respectively. That was an increase from 17% of business owners who reported using credit cards in 1993 (Hise, 1998). Credit cards have been a route that has required fiscal discipline for effective and beneficial use. Cardholders have had to pay the full balance each month or have had to accept a relatively high interest charge on any unpaid balance.

Micro Lending and Franchise Lending

At least two forms of what might have been, technically, personal lending have

had direct linkages to the actual venture that the entrepreneur had decided to pursue. Those have been accessing funds through micro lending, which has been organized by nonprofit organizations, and franchisers’ lending, which has been provided by for-profit organizations. Micro lenders have typically granted smaller loans, less than $25,000, and those funds have served as seed capital for start-ups (Fraser, 2001; Painter and Tang, 2001). Often micro loan programs have offered borrowers training and assistance in addition to funds for the new business. Recently, Hedy Ratner, co-president of Women’s Business Center in Chicago, pointed out that specialized micro loan programs, which serve unique clientele such as women and minority entrepreneurs, could offer a feasible capital solution for some business people who were without other viable prospects

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(Fraser, 2001). Micro lending programs have also been established through universities and governmental agencies; these are discussed under the “Subsidies and Incentives” heading later in this paper (Incentives and Resources, 2001; Painter and Tang, 2001; Wasilowski, 2001).

Franchise sellers have offered small but vital start-up loans, unsecured cash flow

loans, or loan guarantees to their prospective franchisees (Goldstein, 1995; Whittemore, 1993). These loans have usually been unappealing to banks as business loans because of their small size, most often less than $500,000. On the other hand, the franchisor has found the franchise’s tangible and intangible assets, which have frequently been attached to the financing, to be attractive and valuable (Goldstein, 1995).

Collateralized Loans, Mortgages, and Home Equity Loans

Collateralized lending has been the extension of credit to business people, who

have offered to surrender some personal asset or collateral if they should default on the debt (Binks and Ennew, 1996; Blechman and Levinson, 1991; Fraser, 2001; Resnik, 1988; Shulman, 1994; Stevenson, et al., 1985; Szabo, 1992). Loans have been collateralized with houses, other real property, automobiles, jewelry, fine art, collectibles, negotiable securities, inventories, equipment, copyrights, patents, or trademarks and have been extended by individuals or banks or any number of financial institutions or consortia of lenders (Blechman and Levinson, 1991; Fraser, 2001; Winberg and Landstrom, 2001). Although inventories or equipment do not sound as if they would be personal in this situation, they are the personal property of the entrepreneur if the business has been formed as a proprietorship or a partnership. The financial contracts used for collateralized loans have been formal and constructed specifically for the type of obligated asset (Stiglitz and Weiss, 1981). Entrepreneurs have found borrowing this way attractive because of the ease of negotiating the arrangements and the increased liquidity the loans have provided. One of the clear “down sides” of this financing genre has been the restrictions that the lenders have placed on the disposition of the assets and, in some cases, the reporting requirements necessary as inventories’ or other assets’ conditions have changed. Inventories have been subjected to particular scrutiny in this regard because of their continually changing composition and value. Some of the funding techniques used to accommodate the nature of inventories have been warehouse receipts or liens, floating liens, field warehousing, chattel mortgages, conditional sales contracts, time-sales financing or floor planning, and public warehousing (Arkebauer, 1993; Prentice Hall, 1993; Shulman, 1994).

Second mortgages on residences or home equity loans have also figured largely in

the workable financing options for business founders (Bird, 1989; Dennis, 1998; Prentice Hall, 1993). Often the interest rates have been attractive, the interest expenses have been tax-deductible, and lenders have been eager to work with the borrower. However, appraisal fees, closing costs, and other charges have been part of securing this type of collateralized loan. The primary drawback for most individuals has been that the collateral has been the entrepreneur’s home, and it has remained at risk until the loan has been repaid.

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Insurance companies or pension funds have occasionally provided funds to

entrepreneurs through collateralized loans, but typically the portfolios of loans these institutions maintained have been “longer money,” a minimum loan term of five years, backed by real estate (Arkebauer, 1993; Shulman, 1994). Two other considerations for many business owners who have examined these sources of capital options have been the large dollar size of the normal lending agreement and the indirect approach usually seen with this category of lender. Most often the entrepreneur has contacted a commercial banker, who subsequently initiates negotiations with the insurance companies and pension funds. Investment bankers have also made the initial arrangements for business founders seeking more substantial funding through insurance companies or pension funds (Shulman, 1994).

Insurance Cash Value or Retirement Account Withdrawals

These options for financing have been roughly equivalent to an entrepreneur’s

borrowing money from the bank of “me.” Some people have used the discipline of making regular payments into whole life insurance plans as a way to make their personal savings habits routine by building the cash value in the policies. And some men and women have made a pattern of saving through payroll deductions for or regular contributions into retirement accounts. In some circumstances, the accumulated funds from the cash value of a whole life policy or a withdrawal from a retirement account might be the best choice open to an aspiring business owner (Goldstein, 1995; Van Auken and Neeley, 1996). One of the major pluses to this route of getting the capital needed to begin or sustain a venture has been relatively easy access for the entrepreneur. But if the entrepreneur fails to repay money borrowed in this way, penalties may apply, or the ultimate value of the policy or account may be reduced. Penalties and interest changes may also apply to these transactions.

On-Line Credit Matching Services

The advent of the World Wide Web has presented the comparatively new

technology-enabled option of on-line credit matching services (Fraser, 1999). Web-based credit matching services have accepted applications from potential borrowers and matched them with appropriate non-bank and bank lenders for a fee. Some of the lenders that have participated are firms such as American Express, Heller Financial, and First Union. Convenience has been a great advantage for entrepreneurs using this financial tool, but two points of concern for on-line services have been confidentiality and inadvertent damage to credit scores. Some individuals and/or their businesses have damaged their credit rating by using this technique because the same application was simultaneously “shopped” to many lenders. Part of credit scoring has been to track the number of times applications for credit were made and whether the applications were accepted or denied. Whether the potential borrowers ever acted upon the acceptance or denial was irrelevant. A high number of attempted applications for credit had poor connotations in the lending community’s scoring system (Fraser, 1999).

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Relationship Resources

Families and friends have been great sources of inspiration, emotional and

psychological support, and funding for entrepreneurs, especially when the situation has not appeared to be very promising (Vesper, 1990). Business owners have gotten capital in this way when other would-be lenders have not been willing to extend credit for one reason or another (Bird, 1989; Blechman and Levinson, 1991; Fenn, 1999; Fraser, 1999; Granovetter, 1985; Schell, 1996; Van Auken and Neeley, 1996; Winberg and Landstrom, 2001). Those persons, with whom the entrepreneur has had social or familial relationships, have contributed funds by gift of money, through direct loans, or by guaranteeing loans from institutions (Fraser, 1999; Sharma, 1999; Whittemore, 1993). Another route by which families and friends have contributed to new or expanding firms has been to purchase assets in their own names for the businesses’ operations. While the entrepreneur and his or her business used the equipment, land, buildings, or vehicles, a relative or colleague has held title to and is responsible for the property (Fenn, 1999). Family members and friends have also lent labor and professional expertise to ventures either by donating the time or billable hours or by accepting below-market salaries or fees (Fenn, 1999; Winborg and Landstrom, 2001). Even though these practices have been quite common and beneficial to entrepreneurs, the potential downside risk has been grave. If debts remain unpaid or obligations seem to be unmet, the business founder might damage his other connections to individuals who have been the most important in his or her life.

Barter Entrepreneurs have used barter, trading services or goods between two parties, a type of commerce that existed before explicit monetary systems were created. And, to the present, independent business people have used this method to get the resources needed to sustain their ventures. One-on-one barter has been used for an extremely long time, but comparatively new organized barter exchanges have made transactions easier. Organized barter exchanges offer more flexibility in the forms of barter so that the coincidence of needs between two parties is not necessary. Barter credits, which have been earned in an exchange through any transaction, are traded for services offered by any member of the exchange (Szabo, 1992). Barter has been used to get equipment, inventory, vehicles, real estate, or professional services. And this has been a wonderful option for a person or firm with a non-performing or an unproductive asset that can be traded for a more productive asset owned by another person or firm (Szabo, 1992; Winborg and Landstrom, 2001). For most barter exchanges of assets or services, few, if any, drawbacks exist; however, care is necessary to meet legal requirements in cases involving title transfers or legal registrations.

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Quasi-Equity

Equity has equated to ownership. To diminish the entrepreneur’s ownership in a business has been anathema to many financial bootstrappers. But entrepreneurs have also chosen to take prioritized measures as needed, including financial actions, to accomplish their goals in operating successful businesses (Landstrom and Winborg, 1997; Myers, 1984). With quasi-equity, entrepreneurs have chosen to relinquish some ownership interest in the business, but the quasi-equity has not been actively traded, has been held by one or a few individuals, and has not been sold with the ultimate objective of an initial public offering (Ang, 1992; Wetzel, 1983). Quasi-equity methods to obtain resources have included partnerships, individual or group angels, adventure capitalists, equity interests traded to incubators, and credit enhancers (Ang, 1992; Arkebauer, 1993; Blechman and Levinson, 1991; Freear and Wetzel, 1990; Schell, 1996; “Start-up Nation 21,” 2001; Wetzel, 1983).

Partnerships

Partnerships have combined the assets of two or more persons in the pursuit of

forming, operating or expanding an enterprise (Schell, 1996; Tarkenton and Smith, 1997). Partners have provided many advantages to businesses by contributing labor, expertise, ideas, and/or resources to a venture in exchange for an ownership interest. The many possible advantages of combining resources have been the distinguishing characteristic of partnerships; partnerships have usually gone beyond the simple acquisition of capital. If access to additional capital is the only motive for taking a partner, one of the specialized forms of partnership, which specify ownership rights and managerial prerogatives and financial responsibilities, might be better suited for the entrepreneur than a general partnership. A large number of different, legally specific types of partnerships are available to meet most peoples’ parameters, regardless of how seemingly arcane those might be. Because of the legal, financial, and tax implications stemming from any partnership agreement, an entrepreneur would be well advised to investigate the options carefully, through his or her own research or in consultation with an attorney or accountant, before initiating a conversation with a possible partner. A poor choice of partner or partnership agreement could be very expensive in psychic, legal, and financial terms. Angels

Angel investors have provided capital to entrepreneurs in exchange for a share of equity or ownership in a new venture. These investors have characteristically made “informal” arrangements; do not finance ventures as a profession (Blechman and Levinson, 1991; Stevenson, et al., 1985); have not been family, founders, or friends; and have usually invested in businesses located close to their homes (Freear and Wetzel, 1990; Landstrom, 1992; Schell, 1996; Tarkenton and Smith, 1997; Wetzel, 1983; Winborg and Landstrom, 2001). Angels have often been individuals who have succeeded in the same or a related industry or have been service providers to smaller or newer businesses, such as attorneys or accountants. It has been common for angels to want

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some non-financial rewards, for instance, to develop a rewarding relationship with the entrepreneur and to serve in some sort of consultation role (Bhide, 2000; Freear, et al., 1994; Wetzel, 1983). Angels have preferred to find competent and trustworthy entrepreneurs and to work with the founders in the businesses’ early start-up stages by infusing seed money or first-stage funding (Busenitz and Fiet, 1996; Fiet, 1995; Freear and Wetzel, 1990; Harrison, et al., 1997; Landstrom, 1992). Angels’ behaviors, practices, and points of entrance into the funding cycle have been complementary to many of venture capitalists’ habits (Bruno and Tyebjee, 1985; Freear and Wetzel, 1990; Wetzel, 1983). But venture capitalists have not been bootstrap financiers because of their ultimate and stated objectives for the firm.

Venture capitalists have made investments acting as professionals who have

focused on initial public offerings for the enterprises they had chosen, with clear exit strategies in place from the beginning (Bruno and Tyebjee, 1985). Venture capitalists and angel capitalists have exhibited great differences in their approaches to evaluating risk and to risk avoidance (Fiet, 1995). Venture capitalists’ combined sets of expectations and attitudes may have, at least partially, explained the complex deal structures that have existed, in terms of timing, exit strategies, and debt and equity provisions (Camp and Sexton, 1992).

Entrepreneurs have gained access to angels through capital intermediaries and

business brokers or by connections into informal networks, which have frequently been composed of service providers or successful business founders (Blechman and Levinson, 1991; Fraser, 1999; Wetzel, 1983). For some business owners the nature of the approach to angel capitalists has, at times, been a drawback. Whether the initial access to the angel has been direct or indirect, the entrepreneur should seek legal advice in reference to securities laws before any overtures have been made or conversations have taken place. The new venture’s founder should attend to securities laws carefully through any negotiations or agreements to avoid disappointments and resulting headaches in the future (Blechman and Levinson, 1991; Stevenson, et al., 1985). But on the much more positive side for entrepreneurs, angel capital has had the “patience money” feature. Angels have shown more flexibility in both the holding term and the liquidity of their investments (Wetzel, 1983).

Angels have appeared in other configurations than the most common one—a

successful, middle-aged individual (Wetzel, 1983). Angels have pooled their resources occasionally to act as a group of investors rather than individually, but the angel-type preferences and behaviors have held true whether the deals were made by one person or a consortium (“Angel Network,” 2001; Sharma, 1999; “Start-up Nation 21,” 2001). Although a discussion appears later in this paper, it is worth mentioning here that universities have sponsored angel funding, which has been used by entrepreneurs in the very early stages of developing their businesses (“Angel Network,” 2001; Wasilowski, 2001).

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Adventure Capitalists, Incubators’ Interests, and Credit Enhancements

Several other forms of equity trades to get necessary resources exist. Adventure capitalists have had a presence in the informal capital market; they have not invested in new ventures to make a living but to use their discretionary capital wisely. These investors have generally had a lower level of sophistication, used their own money exclusively, offered small amounts of funding, and have been easier to “sell” on a new business’ idea (Blechman and Levinson, 1991). Corporate-owned incubators have occasionally negotiated equity interests in businesses in exchange for seed money for entrepreneurs (Sharma, 1999). Credit enhancements have been a hybrid form of indebtedness that has had warrants attached so that a third party, not the lender, could buy stock at some point in the future. With this method, a third party has agreed to pledge securities to enhance the liquidity of collateral that a business owner has offered to a lender. It has not been widely used (Arkebauer, 1993). Even though credit enhancements have not been representative of a large part of the informal equity market, they have shown the lengths to which entrepreneurs will go to motivate parties to cooperate in accomplishing the entrepreneurs’ financial objectives.

Cooperative Assets

Bootstrap financiers have used social as well economic transactions to gain assets

needed for their enterprises’ success (Aldrich and Zimmer, 1986; Starr and MacMillan, 1990; Vesper, 1990). Cooperation, the person-to-person exchange, has allowed businesses’ founders to deploy or leverage their tangible and intangible assets for more space, a wider variety of equipment, expanded capacity, greater purchasing power, better negotiated terms, and larger customer bases (Winborg and Landstrom, 2001; Starr and MacMillan, 1990). Entrepreneurs have shared or borrowed equipment, facilities, and vehicles quite often for start-up operations and on a continuing basis (Finegan, 1995; Goldstein, 1995; Winborg and Landstrom, 2001). Shared employees, especially administrative assistants and staff persons, have been used for years, especially among groups of individual professional service providers, who have shared space and equipment. These professional cooperative groupings have also gained the added intangible benefit of a seemingly larger and more impressive firm (Starr and MacMillan, 1990). Further, entrepreneurs have stretched their dollars through joint equipment ownership or space rental (Fraser, 1999; Tarkenton and Smith, 1997; Winborg and Landstrom, 2001). Sharing, borrowing, and joint ownership can work well, but maintenance of a healthy working relationship among the parties is critical for success in using this method of bootstrap financing.

Effective confederation among newer ventures has enhanced buying power and

customer retention in at least two other ways. Coordinated purchases have given entrepreneurs several advantages with vendors (Winborg and Landstrom, 2001). When several firms have combined smaller individual orders into one larger order, the relationship-wise business owners have been able to meet minimum order requirements, received discounts on quantity purchases, received quicker or more convenient deliveries,

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or negotiated better terms for the sale. Businesses have also shared customers through an assortment of informal customer-sharing alliances, which have offered advantages to the allied firms and to their customers (Goldstein, 1995; Rowland, 1995; Tarkenton and Smith, 1997). Customers have often gone to entrepreneurs with whom their business experience has been good and asked for referrals for other types of services or merchandise. Or a firm could sell complex projects or solutions and may direct customers to other businesses for an integral part of the project, which is outside the scope of the entrepreneurs’ operations. In either situation, clients are shared, and cooperating businesses are promoted within the informal alliances. The buyers make the ultimate choices from among their referred or secondary vendors; this is unlike an outsourcing arrangement.

Another form of cooperative access to needed resources is a combination of social and economic transactions, the support services paid for by an affiliate or conversion franchisees. With an affiliate or conversion franchise, independent business owners have overcome the challenges of operating in highly fragmented industries. Firms that have been part of a fragmented industry have frequently had little economic power owing to the small size of each independent business. An example of this type of industry is the real estate brokerage industry. The affiliate businesses have the option of operating under a common name and pooling their purchasing, advertising, and marketing resources for greatly increased market power and visibility over what they would enjoy as singular business entities (Entrepreneur Media, Inc., 1999).

Customer or Client Financing

Customer or client financing has aided entrepreneurs through several different forms of direct financial support or funding, as well as some indirect forms, which are discussed in the section, “Subsidies and Incentives,” that follows. Customer-related sources of money have included prepaid licenses or royalties, advance payments on purchases or service contracts, client “front” funding for research and development, letters of credit for international transactions, and “invest-omers.” One common benefit among these techniques, other than the interest-free capital, has been that the clients and customers have made an economic and a psychic investment in the venture with these varying types of financial commitments (Fraser, 2001; Freear, et al., 1995; Hyatt, 1990; Sharma, 1999; Stevenson, et al., 1985; Vesper, 1990). Although customer financing has been a wonderful source of cost-free short-term money for ventures’ founders, most forms of client funding have created an overhanging liability associated with the resources.

Licensing to or obtaining prepaid royalties from more cash-flush customers for proprietary use of processes or technologies have generated much-needed cash flows for new and growing businesses (Fraser, 2001; Hyatt, 1990). With this method, entrepreneurs have seen some of their most productive ideas put to effective use without restricting themselves and their firms’ operations to what could have been demanding, or preemptive, implementation costs associated with their proprietary assets. Advance

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payments for concrete products or defined services from clients have increased working capital, just as the license or royalty payments have (Shulman, 1994). Advance payments or, in accountants’ language, unearned income has appeared on balance sheets as a liability; but these funds have been “cash in the bank” for business owners. Customers have sometimes also been willing to fund research and development contracts in advance. These particular agreements have been relatively common among companies that have been part of a high technology or technology and/or research intensive industry (Freear, et al., 1995; Sharma, 1999).

Letters of credit have been particularly important to entrepreneurs who have

conducted their businesses through commitments and purchases in foreign countries (Entrepreneur Media, Inc., 1999; Stevenson, et al., 1985). After the client or customer firm has written the letter of credit, the entrepreneur takes the letter of credit to a bank in the foreign location and uses it as collateral. The entrepreneur is then able to make foreign purchases and payments while using none of his or her own money. This method has offered not only access to resources at no cost but has eliminated a whole array of difficulties associated with conducting off-shore business transactions.

“Invest-omers” have typically been large firms that have developed strong economic or social interactions with specific entrepreneurial companies, i.e., both parties to an invest-omer relationship have pronounced preferences for dealing with each other. Invest-omers have supplied money for expansion to new or smaller businesses that were their vendors. The major customer companies have done this in the belief that they would most likely benefit from helping the company grow and increase in value (Fraser, 2001). It may be appropriate to characterize these relationships as tactical or strategic to a specific purpose rather than being engendered by any explicit obligations or liabilities.

Cash or Asset Management Entrepreneurs have used cash management techniques, especially trade credit, for

years. Scholars have studied many aspects of entrepreneurs exploiting cash management for the benefit of their ventures (Blechman and Levinson, 1991; Cooley and Pullen, 1979; Grablowsky, 1978; McMahon and Holmes, 1991; Stevenson, et al., 1985; Winborg and Landstrom, 2001). Fundamentally, cash management techniques have all been targeted at the most effective use of companies’ assets through delayed cash outflows, accelerated cash inflows, and enhanced asset productivity (Prose, 1993). The clear benefits of using these techniques have been to improve the firm’s liquidity position, to increase the yield or return on assets, and to avoid or minimize less productive commitments of resources. One drawback or caution to be considered is that business owners could use some of these methods to an extreme, which is potentially detrimental to the ventures. Entrepreneurs need to give thoughtful consideration to the risk and return trade-offs evident in some of these approaches.

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Trade Credit, Deferred Taxes, Float, Overdrafts, Account Transfers, and Skip Loans

Delayed cash outflows have been widely used by entrepreneurs, individuals, major corporations, and governmental bodies as ways to preserve cash for alternative short-term uses. Some of the more common methods to delay cash outflows have been the use of trade credit, deferred tax payments, “float,” overdraft privileges, account transfer arrangements, and skip loans. Trade credits have been a common tool for entrepreneurs to use to improve cash flows. Approved clients and customers receive interest-free financing for their purchases because of the time lag between the physical receipt of the merchandise and the payment date specified on the billing for those same goods when trade credit has been used effectively (Frazer, 2001; Freear, et al., 1995; Resnik, 1988; Shulman, 1994; Tarkenton and Smith, 1997; Winborg and Landstrom, 2001). The time lag may be a few days or a few weeks; but, in any case, the cumulative effects of buying before paying over a year’s time have yielded many business owners good returns on their money. Cash, paid at the latest specified time to avoid fees or interest and to take advantage of any discounts, has been “at work” in other accounts earning interest or in other capacities, such as meeting a payroll or buying supplies. Delayed payments’ terms and conditions have usually been negotiated with vendors, who have extended credit terms to their customers prior to purchases having been made. But delayed payments have been legitimately and legally made to governmental taxing bodies as well.

Entrepreneurs have deferred tax payments to almost any and all governmental

taxing bodies, and they have taken these actions appropriately (Landstrom and Winborg, 1997; Resnik, 1988). With deferred tax payments, the date that the obligation or liability has been recognized, in accounting terminology, has not been the same as the date that the money has actually been paid to the government. Once again there has been a potentially advantageous lag between recognition of a liability and settlement of the liability. It has been crucial for business owners to consult with qualified accountants to be confident that proper forms were filed, necessary notices were given, and specified actions were taken. Further, circumspect entrepreneurs have weighed any possible penalties or interest liability while making a decision regarding deferred tax payments. Taxation laws change regularly, and the advice of professionals has been vital for good decision-making in this venue. But deferred taxes have remained an option for entrepreneurs in some situations.

Small business owners have also enjoyed some extremely short-term financing by

way of their institutional accounts, most typically commercial bank accounts. “Float” is the difference between the time and date that checks are drawn on accounts and the time and date that checks clear accounts at commercial banks, credit unions, or similar financial institutions. At one time, payments made to distant creditors could have taken days or even weeks to clear an account, especially with reliance on the postal service for delivery. But circumstances have changed dramatically for any particular situation because of speedy, especially electronic, transfers of payment from account to account (Resnik, 1988). In some ways, modern technology and communications have brought this alternative, relying on the float, almost to an end. Speedy account clearing devices

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and software have made the risk of relying on float resulting in a check being drawn on an account with insufficient funds, with its accompanying inconvenience, damaged credit reputation, and fees, much higher than in the past.

Overdraft privileges and account transfers have been reliable methods for

accessing very short-term money. Overdraft privileges have been arranged to preclude the risks of having a check drawn on an account with inadequate funds presented for payment (“Banking Services,” 1999; Carty, 1994; Landstrom and Winborg, 1997; “Overdraft Protection,” 2001). Overdraft privileges have been similar to a permanent credit line in that checks drawn on accounts that would have otherwise have been overdrawn have automatically been made “good” by the bank (“Overdraft Protection,” 2001). Account transfers have been a possible choice to cover any failure in the float to have been as long as the entrepreneur had hoped. If a check has been presented for payment to a bank account with an inadequate balance, funds were drawn from another previously specified account to cover any shortage (Plans and Accounts, 2001). These routes have the advantage of attesting that the entrepreneur involved anticipates rather than reacts to problems, although the fees and interest charges for the services may be relatively high.

Skipped-payment loans have been another way for business owners to foresee and

to make arrangements for reasonably anticipated cash shortages (Arkebauer, 1993). Entrepreneurs who have operated businesses with highly seasonal cash flow patterns have negotiated loan agreements with customized payment schedules. These were structured so that payments were not due at the times that funds shortfalls were anticipated. The keys for skipped-payment loans have been to anticipate, plan, and negotiate the arrangements well in advance of the shortfall. Accelerated Cash Receipts from Customers

Entrepreneurs have sought to speed up the receipt of cash whenever possible; the reason has been the reverse of the rationale for delayed outflows. Accelerated inflows allow business people to use the money to meet other needs in a timely fashion. Business owners have used several different tactics to accelerate receipts from customers or clients (Shulman, 1994). Some of the more widely used techniques are sound internal controls on the management of accounts, early payment discounts, late payment penalties, specified places of payment, the sale of accounts receivable, and loans against accounts receivable (Blechman and Levinson, 1991; Entrepreneur Media, Inc., 1999; Finegan, 1995; Resnik, 1988; Schell, 1996; Szabo, 1992; Winborg and Landstrom, 2001). Collecting payments for credit sales quickly has been important, but the choice of method and deployment style of the technique has been, perhaps, equally important to preclude alienating customers. Clearly, credit sales rather than all cash sales have been assumed for the sake of this discussion.

The basic devices to achieve quicker collections have relied upon sound record

keeping, clear communication regarding credit terms, careful account balance and age monitors, appropriate notices or reminders, and follow-up conversations (Entrepreneur

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Media, Inc., 1999; Finegan, 1995; Resnik, 1988). Business owners who have implemented these procedures thoughtfully and consistently have generally been successful in receipts management. Entrepreneurs have given discounts that amounted to 1% or a little more on invoices for prompt payment, often within no more than 10 days of billing (Resnik, 1988). A different approach has been to penalize late payers a small percentage of the balance and sometimes to add a monthly interest charge as a carrying fee (Entrepreneur Media, Inc., 1999). Specifying the place of payment, literally the location to which the payment has been sent, has been an important tool for ventures selling to customers widely dispersed throughout the United States. The object of this intervention has been to minimize the time between the client’s making a payment and that payment’s being deposited in the vendor’s accounts (Entrepreneur Media, Inc., 1999). Again, with the advent of more rapid communications and electronic transfers, place of payment’s importance may have diminished for some businesses or industries.

Factoring has been the term used to connote a business owner selling his or her

accounts receivable in order to turn the asset into cash more quickly (Blechman and Levinson, 1991; Schell, 1996; Shulman, 1994; Szabo, 1992). “Factor” has connoted the person who has chosen to buy the accounts receivable. Usually, the factor purchased the accounts at a substantial discount, or the business paid an interest charge on the amount of the account until it was paid. Entrepreneurs in one of the retailing or manufacturing lines of business have relied on this approach regularly. Drawbacks to factoring have been the heavily discounted price paid by factors and factors who have been reluctant to buy any but the best accounts receivable in regard to how current the balances were and if the creditor was reliable. A great advantage of this technique has been the opportunity to generate cash before the accounts were due from clients and customers (Blechman and Levinson, 1991).

Entrepreneurs have borrowed against or pledged accounts receivable in

collateralized lending agreements (Blechman and Levinson, 1991; Shulman, 1994). This way of accessing the cash represented by accounts receivable has had some of the same advantages and disadvantages of any collateralized borrowing. For instance, the creditworthiness of the business’ owner, in the case of proprietorships or partnerships, and the quality of the accounts receivable have affected the credit grantor’s predisposition to lend. The terms of conditions of this technique have seemed onerous to some entrepreneurs. Usually the business’ entire group of accounts receivable has been taken as collateral on the loan; when the loan is initiated, the business receives a sharply reduced percentage of the total dollar value of the accounts receivable through the loan (Blechman and Levinson, 1991). Short Term Investments, Inventory Minimums, Used Equipment, and Theft Control

Enhancing the productivity of almost any asset has been a way to increase cash

inflows to a business. Some assets have been more amenable than others to better or more effective use, but cash in non-interest bearing or low-yielding accounts and inventories can often be worked to better advantage. The buying power of a business can be increased by the choice of used versus new equipment and by reduction of theft from

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the enterprise to its lowest possible level. Short-term investments of excess funds have served entrepreneurs by generating cash that otherwise would not have been realized (Cooley and Pullen, 1979; Grablowsky, 1978; Resnik, 1988). It is advantageous for business owners to move idle cash to interest-bearing accounts whenever possible. At one time the average small venture had cash amounting to about 3% of sales in non-earning accounts at any one time. But changes in the commercial banking and brokerage sectors have given people many more options, even in simple checking accounts, so that this missed earning opportunity can be virtually eliminated with few or no additional transactions.

Minimized inventory, while avoiding a negative effect on customer service or delivery times, has been another way that venture owners have improved the return realized from their enterprises (Goldstein, 1995; Landstrom and Winborg, 1997; Resnik, 1988; Shulman, 1994; Tarkenton and Smith, 1997). Some of the tools to reduce inventory, but keep adequate levels of stock, have relied upon sound record keeping, coordinating communication with customers and clients, anticipating seasonality, and monitoring the age of merchandise and supplies. In recent years, these tactics have become less difficult for entrepreneurs to implement because of rapid and inexpensive technology and more flexible and responsive vendor and transportation choices. Consignment, holding goods out for sale without having title to the goods, has remained a good option for many entrepreneurs (Goldstein, 1995; Resnik, 1988; Shulman, 1994). No investment in the consigned products or art has been a exceptional advantage for new ventures, and the ultimate vendor has little concern if the entrepreneur is a viable seller and has proper insurance.

Used equipment purchases have been a mainstay for bootstrappers to realize the most value from each dollar invested in the business (Blechman and Levinson, 1991; Resnik, 1988; Whittemore, 1993; Winborg and Landstrom, 2001). This has been an especially good technique for equipment that holds its value or productive life. Used equipment normally costs less, and the buying entrepreneur often is able to arrange financing or leasing for the purchase.

Finally, theft control holds great importance for virtually all entrepreneurs in

managing their assets (Resnik, 1988). Put bluntly, theft represents 100% cash out with 0% cash in for a business, and that is the best scenario. The more likely case is that a theft would represent more than a 100% “dead loss” because of the replacement cost of the asset. Also, insurance premiums may be affected adversely. A surprising percentage of the businesses that have failed annually attributed their demise to a fatal theft incident. Even small thefts may reduce the profitability of a venture. Customers, employees, competitors, vendors, service providers, corrupt officials, or almost any other entity that has any interaction with a business has the opportunity to steal from it. Entrepreneurs are well advised to take measures to minimize this activity. Any asset that has existed has been stolen, but the more easily the asset can be turned into cash, the more attractive it has been for theft. For those reasons, prudent entrepreneurs have usually put systems in place to monitor cash, cash accounts, inventories, and some supply items, such as gasoline or stamps.

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Leases

Leases give entrepreneurs a way to enjoy the use and productivity of equipment, vehicles, and facilities without some of the burdens of purchasing those assets (Winborg and Landstrom, 2001). Regardless of the features involved in any specific lease agreement, the paramount advantage to the business owner is the conservation of cash. That parsimonious use of funding is realized through possible lease characteristics, such as low initial cash expenditures, less stringent finance qualifying requirements, no equipment obsolescence concerns, negligible maintenance costs, and tax advantages. But some disadvantages may weigh against the pluses of lease arrangements; those include no ownership rights, the possibility of a higher total long-term cost, and the inability to cancel some leases. Many varieties of leases are available to meet most business owners’ needs and limitations profiles, but four of the more common leases are closed-end leases, open-end leases, sale and leasebacks, and venture leases (Arkebauer, 1993; Blechman and Levinson, 1991; Entrepreneur Media, Inc., 1999; Fraser, 1999; Goldstein, 1995; Resnik, 1988; Shulman, 1994). Different permutations of each of these four basic types are available.

Closed-end leases, which have been called straight or operating or maintenance leases, are the simplest routes to take. The lessee pays a fixed payment over a specified period of time, and then the asset physically reverts to the lessor. The lessor has to bear the responsibility for any needed repairs or replacements. For the entrepreneur, one great advantage of the closed-end lease is that payments are recognized as expenses only, and no assets or liabilities associated with the closed-end lease are posted to the balance sheet (Entrepreneur Media, Inc., 1999; Goldstein, 1995; Resnik, 1988; Shulman, 1994). Open-ended leases are called capital leases or financial leases and have some clear distinctions from closed-end leases. The lessee keeps the responsibility for a fixed periodic payment to the lessor, but he or she also takes the responsibilities associated with ownership—maintenance costs, insurance, and taxes. At least one potentially big advantage of open-end leases should not be overlooked; these leases are treated as loans for accounting and tax purposes so that depreciation is routinely taken against the leased assets (Blechman and Levinson, 1991; Entrepreneur Media, Inc., 1999). Sale and leaseback agreements have been made by entrepreneurs selling equipment or real property that they owned to a leasing company, which immediately leased it back to them (Blechman and Levinson, 1991). By doing this the business owners have freed up all the money in those assets, have the use of the property, and have written off all the lease payments as expenses.

Venture leasing is a relatively new form of lease arrangement, and, not surprisingly, the one major qualifier for venture lease funding has been the enterprise’s having won venture capitalists’ money by selling sizeable equity interest in the firm. This form of lease financing has been acquired at comparatively high lease rates unless

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the entrepreneur has negotiated more favorable lease arrangements by sweetening the deal with stock warrants. This niche of the lease market has been serviced aggressively by a small number of venture lease firms and banks (Arkebauer, 1993; Blechman and Levinson, 1991; Fraser, 1999).

Outsourcing Entrepreneurs have relied on outsourcing to satisfy their firms’ need for at least as long as they have retained independent professionals’ services rather than having hired those same professionals as employees. Outsourcing, simply put, has been using people and things, i.e., resources not owned or controlled or legally employed by the company, to accomplish whatever has been necessary. Manufacture or production, sub-assembly, delivery, and customer service have been operations that were outsourced by entrepreneurs. Recently, these purchased forms of business-level division of labor have become known as flexible networks or virtual corporations (Goldstein, 1995; Tarkenton and Smith, 1997). Professional services from attorneys, accountants, marketing specialists, architects, engineers, or any other “experts” have been accessed in this way, just as temporary employees of many descriptions have been (Bisk, 1997; Fenn, 1999; Landstrom and Winborg, 1997). Cash preservation has been accomplished with outsourcing by “renting” production capability, service capacity, and capable individuals’ time instead of making any long-term binding commitments in capital or legal obligation. The potential problems with this bootstrapping technique are trying to preclude coordination glitches from poor communication, over committed time, or unreliable people and companies in the outsourcing network.

Subsidies and Incentives

Entrepreneurs have received subsidies and incentives, direct or indirect funding or

support, to meet a great variety of enterprise needs. Businesses have earned or received subsidies and incentives to conserve cash through cost reductions in wages, rent, maintenance, equipment, remodeling, moving, training, and developmental expenditures. Governmental units, universities, and private corporations have made subsidies and incentives available to businesses to accomplish specific objectives or as beneficial byproducts of fulfilling their missions in the larger society. From the agencies’ perspective, subsidies and incentives have promoted economic development, job creation, natural resource conservation, better and more child care, site decontamination, pollution control, fuller employment, improved or expanded housing stock, building restoration, agricultural or forestry or fisheries improvements, basic scientific research, and many other broad goals (About TIF, 2001; Blechman and Levinson, 1991; Winborg and Landstrom, 2001). Clearly, subsidies and incentives have offered financial benefits and reward to businesses. The disadvantages of a business owner’s seeking subsidies or incentives are the time spent to find those that could benefit the venture, the effort spent in paperwork and meetings, and the commitment to comply with reporting requirements that accompany the money.

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Direct Municipal or County Funding

Business owners have received supplemental payments or reimbursements to

reduce the costs of training or educating or retraining employees through grants, loans, and shared costs provided by local government bodies. Loans must be repaid; grants do not require repayment; and shared costs do not need to be repaid or are recharged at a later date. Although the numbers of these initiatives have been limited, municipalities and county governments have directly subsidized some efforts to increase employment, enhance the value of infrastructure, and attract businesses to their areas (About TIF, 2001; Blechman and Levinson, 1991). Locally sponsored subsidies have also assisted business owners with welfare-to-work training and education costs incurred to put new workers in the enterprise (About TIF, 2001; Employment Subsidies, 2001). Entrepreneurs have found workable facilities at reduced expense, with subsidies for building rehabilitation costs in older or blighted business districts (About TIF, 2001). Subsidies to relocate firms into specific areas have been extremely helpful to the bootstrapping entrepreneur (About TIF, 2001). These are a few examples of cash- conserving options that business owners have taken; many other forms of direct funding may be available in a specific area. Reduced costs have great appeal, but the entrepreneur will be wise to conduct as thorough a cost-benefit analysis as possible before pursuing some options too far.

Indirect Municipal or County Funding

Entrepreneurs have received indirect support through lower negotiated and paid

rates for services (Blechman and Levinson, 1991). Indirect support from municipal or county governments is usually gained as a credit against an expense or a direct reduction in a charge, such as a tax bill, not a payment or reimbursement. Many communities have established enterprise zones or industrial corridors to provide business owners with a variety of incentives to operate in these areas (Financial-NY, 1998; Incentives and Resources, 2001). Apart from the special zones, many cities and counties offer reduced rates on a variety of taxes and tax credits to attract entrepreneurs. Prominent among these are a variety of property tax incentives and employment incentive programs (EIP Tax Credits, 2000; Financial-NY, 1998). Some monies for employment incentive programs for businesses have actually been federal funding, which has been funneled to local communities through grants. Other indirect funding that business owners could investigate are projects that give interest rate reductions on private financing arrangement made for redeveloped property (About TIF, 2001).

For the enterprising bootstrapper, business incubators have sometimes allowed the

costs for facilities and professional services to be lower. Quite a number of local government agencies have established and operated business incubators specifically to provide space, administrative support, and business or technical consulting to new ventures. Often the fees charged for space in the incubator have been at rates well below comparable industrial or commercial square footage rental or lease rates that could otherwise be negotiated in the area. Reduced facilities costs have bolstered some

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enterprises and were the only benefits of tenancy in an incubator’s space at the inception of the incubator movement. But, more recently, community-sponsored incubators have offered business and technical consultation or advice as an additional benefit to tenants (Smilor and Gill, 1986). An attractive byproduct of incubators has been that a group of entrepreneurs in close proximity have often shared ideas and resources, an example of one bootstrap method propagating another. And, occasionally, incubators have a biotechnology, telecommunications, recumbent DNA-related, or other industry segment “theme,” providing particularly rich ground for collaboration. The incubators have clearly offered great potential benefits, but entrepreneurs should be aware of limitations, such as duration of occupancy, that incubators’ clients may find as part of a rental or lease agreement. Another consideration for entrepreneurs is that a local government may expect to have equity in a venture occupying any incubator it sponsors. Direct State Support

Business owners have garnered a significant amount of financing through different forms of direct state support. Wage subsidies and grants have been provided for qualified new or expanding businesses, although states have offered limited support by way of direct lending (Blechman and Levinson, 1991; “Employment Subsidies,” 2001; Prentice Hall, 1993; Schell, 1996). Loans have required repayment, but grants and shared costs have not. With explicit exemptions that were granted, entrepreneurs have been relieved of responsibility for charges or levies. Businesses have conserved funds through relocation assistance grants, targeted real property tax exemptions, and sales tax exemptions (EIP Tax Credits, 2000; Incentives and Resources, 2001). It has not been widely used, but businesses’ founders in some states have been able to negotiate bridge loans to help their firms through periods of seasonality or temporary working capital shortfalls. Entrepreneurs and their employees have also gained from state-funded English-as-a-second language and adult basic education grants (Incentives and Resources, 2001). One caution is that these tools must fit with enterprises’ overall strategies for success. In other words, the entrepreneurs’ objectives should drive the financing strategy, not the reverse.

Indirect State Support

Business people have obtained indirect state support through cost reductions for

many improvements in their work force and in the condition of their properties. Indirect state support has been made available to entrepreneurs through programs focused on hard-to-place workers, employer support services, training programs, research and development, investment, pollution control or abatement, and business incubators (Blechman and Levinson, 1991; Prentice Hall, 1993). States have also been eager to offer tax incentives to business owners who have been willing the hire workers with little or no prior experience working in the private sector (Business Tax Credit, 1999; EIP Tax Credits, 2000; Incentives and Resources, 2001). Although these opportunities have addressed needs for the entrepreneur employing unskilled laborers, more alternatives have existed for entrepreneurs who have sought to hire or develop highly skilled workers. Formally structured apprenticeship programs have been built to give employers

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incentives to invest time, effort, and training dollars in their employees. Services have also been created to assist employers with human resources support issues (Incentives and Resources, 2001).

Research and development tax credits have helped entrepreneurs with necessary

but extremely long-term and high-risk investments to support pure research or to commercialize new knowledge for application in the marketplace (Incentives and Resources, 2001). These types of endeavors have usually required large capital investments for equipment and facilities, which have partially been defrayed by research and development tax credits. Other efforts to foster investments in the equipment and facilities vital for good prospects of newer firms in some industrial sectors have come in the form of investment tax credits. Economic development zones have also been a tool that state governments have used to foster businesses’ opening and growing by allowing them favored treatment with a variety of tax credits, tax deferments, and other incentives (Financial-NY, 1998).

Entrepreneurs, along with the broader society, have benefited from the attention

that many states have given to reducing pollution, cleaning polluted sites, and recovering otherwise unusable locations. Tax credits have been earned to counterbalance the costs of installing pollution control devices and procedures; incentives have been designed to encourage site cleanup of brownfields, old industrial properties that have subsequently been underutilized or abandoned. Municipalities have also helped recover businesses’ costs in the recovery of sites formerly used as landfills. Funding has been made available for the, sometimes, substantial costs involved with cleaning up and restoring property that has received hazardous discharge (Financial-NY, 1998; Incentives and Resources, 2001). Entrepreneurs have used any and all of these funding opportunities to stretch their limited financial resources to aid their businesses.

Entrepreneurs have comprised much of the tenant base in business incubators that

have been run by state governments. State-sponsored agencies, authorities, and revolving loan funds have established business incubators, which have reduced the costs for facilities and professional services used by the tenant businesses (Gatewood and Hylton, 1994). Many of the attractive features and the limitations inherent in incubators have been the same for state as for local government-backed business incubators. Direct Federal Resources

Business owners and founders have accessed limited direct loans and grants from federal agencies or operating units. Federal loan and grant programs have continued, but the continuance has been subject to administration changes, the appropriations process, and many other political factors. At least one other form of assistance has been available to subsets of entrepreneurs, federal contracting preferences (Blechman and Levinson, 1991; Goldstein, 1995). Entrepreneurs have been able to compete for funding through agricultural and conservation programs, innovation or research grants, and preferred contract award initiatives. The probability of winning a federal loan or grant or contract has been low, but the reward for filing successful applications has been great. The

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successful loan applicant has paid below-market interest rates and service fees, the winning grant applicant has not had to repay the money, and some entrepreneurs have received preferred treatment in contract competitions. The primary risk involved for the business owner has been the time and effort spent in preparing long applications versus the probability of winning the loan, grant, or contract.

Agricultural entrepreneurs have benefited from farm and conservation programs

for crops, livestock, forestry, dairies, and fisheries (Blechman and Levinson, 1991; Prentice Hall, 1993). These have involved loans or grants to ensure the domestic supply and production of everything from soy products for animal feeds to natural fibers for fabrics and from treated wood for railroad tie production to chicken or lobster meat. Businesses that process any of these products for consumption or distribution have been qualified to apply for funding also. For specialized industry segments, grants have been targeted to encourage innovation, research, and development for products, packaging, processes, and basic research (Arkebauer, 1993; Blechman and Levinson, 1991). Not surprisingly, research and innovation funds have changed focus along with national priorities.

The nation’s collective thinking and disposition have also influenced federal

agencies to give some newer or smaller businesses an edge in winning federal contracts if members of minority groups or women owned those firms (Blechman and Levinson, 1991). This leveraged status in federal contracting has affected businesses’ cash flow by getting more contracts in the door and has affected the financial strength the businesses have enjoyed in general creditors’ estimation. Small business investment companies or minority enterprise small business investment companies have been sources of funding for these same kinds of companies but have not been included in the bootstrappers’ options. The reason for this exclusion is that the financing that these companies have offered has been venture capital in nature (Blechman and Levinson, 1991).

Indirect Federal Resources

Entrepreneurs have accessed indirect federal resources through reduced expenses,

loan guarantees, and subsidized service providers (Blechman and Levinson, 1991). The situation for indirect federal funding has been similar to that for direct funding. The level of funding and the number of programs have been changeable, reflecting national priorities (Prince, 2001).

If an owner’s enterprise has been part of agricultural production or processing,

greatly reduced charges for water and grazing land have improved the business’ expense structures. These same types of advantages have been available to entrepreneurs with firms in several different extractive or harvest industries using federal lands (Blechman and Levinson, 1991). Federal monies have partially supported employment incentive programs, which were mentioned earlier among local resources. Several initiatives have reduced business owners’ wage, training, and accommodations costs when they have hired young or differently abled employees (Business Tax Credit, 1999; Project ABLE, 1999).

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Loan guarantee programs, offered through the Small Business Administration or

Farm Credit Administration, have been useful tools for entrepreneurs wanting to conserve capital (Farm Credit Administration, 2001; Fraser, 2001; Prentice Hall, 1993; Schell, 1996). The funds have not been direct loans made by the agencies, but the agencies’ guarantees have underwritten performance on debts negotiated with third-party lenders and so have made reduced interest rates on loan or lower loan-generation fees possible. At one time entrepreneurs who sought loan guarantees through the Small Business Administration felt frustration over the length and complexity of the application process. This drawback has been diminished or eliminated for entrepreneurs who have chosen to use the LowDoc Loan Program, which has drastically reduced paperwork (Entrepreneur Media, Inc., 1999).

The federal government subsidizes the Senior Core of Retired Executives

(SCORE) as a method to give businesses’ managers or owners advice and support on a budget (Schell, 1996). SCORE is a volunteer group of retired executives who give advice and counsel to entrepreneurs on almost any conceivable topic from marketing issues to tax considerations. This is a great no or low-cost resource for the bootstrap-minded person.

Direct University Resources

Business owners have few direct funding options from colleges and universities. Some universities and colleges have established micro-lending programs to provide small loans or seed-capital funds for entrepreneurs’ use in establishing or expanding existing businesses. Other post-secondary institutions have set up venture capital funds, which can be a source of funding for business owners; however, the cost of that money is to forfeit a substantial part of the ownership equity in the companies (Stearns, 2001; Wasilowski, 2001).

Indirect University Resources

In contrast to direct funding from universities, indirect university resources are

abundant. Entrepreneurs have reduced or eliminated expenses through the information, consultation, employees, and facilities that colleges and universities have been willing to put at their disposal. The advantages have been clear, and the disadvantages have been few. But chief among the disadvantages has been the time necessary for business owners to find the information, assistance, or service that they need (Colbert, 2001; Fenn, 1999; Goldstein, 1995; Smilor and Gill, 1986).

Entrepreneurs have gotten information, used to meet all kinds of needs, through

universities’ and colleges’ libraries, and Web sites (Fenn, 1999), frequently at no cost. When business owners have needed technical or business advice, faculty members have often served as professional advisors at no or low cost as well. Faculty-supervised student consulting teams are another potentially valuable no out-of-pocket cost service that some institutions provide (Goldstein, 1995). The student team members may be

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undergraduate or graduate students, just as student interns are. Student interns have expanded business owners’ work force with bright, highly motivated, low-cost or no-cost employees. Another university group eager to assist bootstrapping entrepreneurs, is the employment centers or services charged with the responsibility of working with students, alumni, and employers to match temporary or permanent employment needs and positions. This service has usually been no or low cost for business owners.

Universities and colleges have opened incubators to new and expanding businesses, charging reduced rental for space and providing tenants with administrative support and technical advice (Fenn, 1999; Smilor and Gill, 1986). Additional benefits of university incubators are close association with state-of-the-art developments in technology and the advantages of student labor. Another service, for which universities and colleges are ideally suited and that entrepreneurs may capitalize on, is technology commercialization programs or centers (Colbert, 2001). These centers have brought the most promising scientific discoveries to the attention of entrepreneurs so that plans can be developed to bring the new science into the marketplace. A variety of indirect funding options have often been associated with these multipurpose innovation centers. Indirect “Big” Corporate

Indirectly, “big” corporations have offered entrepreneurs—at little or zero cost—

merchandise, equipment, customers, product lines, techniques, access to hardware, and space (Starr and MacMillan, 1990). Industrious entrepreneurs have transformed manufacturers’ free trials or samples into supplies and inventory for their firms (Fenn, 1999; Goldstein, 1995). Occasionally, resource-rich companies have discarded or abandoned product lines that generated too little demand, and clients, who did the same. Equipment and processes, for some reasons other than poor productivity, have met the same fate. These types of plants, equipment, inventory, and clients have been wonderful finds for the bootstrap entrepreneur who can furnish entire businesses by astute corporate gleaning (Starr and MacMillan, 1990). Bootstrap entrepreneurs have “picked up” and successfully served market niches that were too small for a large corporation. This has allowed the bootstrapper to benefit from market and product research and development costs, not to mention promotions and advertising, that the larger corporation had invested in the abandoned product lines and clients (Fenn, 1999; Goldstein, 1995; Starr and MacMillan, 1990). Large commercial entities have also been willing to give developers access to hardware and the free use of equipment (Freear, et al., 1995; Starr and MacMillan, 1990). Corporations have established incubators with all the usual benefits, especially when the tenants were in industry segments related to the corporate sponsor (Smilor and Gill, 1986).

Foundations

Entrepreneurs and their businesses have added to their capital base through funds from foundations that have had overarching charitable objectives. Most often bootstrap financing has come from foundations through direct and flow-through grants but has also

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taken the forms of equity investments, letters of credit, donated services, and direct loans made at low rates with flexible terms over extended time periods (Blum, 1995). Foundations have been willing to make money available to businesses that commercial investors would have found speculative, presenting an unacceptable risk. This degree of patient investing may be partially explained by the foundations’ objectives, such as economic development, job creation, urban renewal, medical research, and education (Blum, 1995; Coleman Foundation, 1998; Gittell, et al., 1996; Tarkenton and Smith, 1997). Some foundations have funded only nonprofit organizations. In such situations, entrepreneurs have worked through established nonprofit organizations, which have agreed to serve as conduits or as “flow throughs” between the foundations and the new ventures (Blum, 1995). Foundations have been excellent sources of bootstrap finance, and the only drawbacks have been the time and effort needed for finding the opportunity and applying for the funding.

The forgoing brief overview of some categories of and sources for bootstrap

finance illustrates the variety and richness of these activities. Scholars have begun research in bootstrap finance, by that name, only recently; but this has opened many opportunities for greater understanding and practical application.

Data and Methods

In the summer of 2002 a questionnaire was used to gather information about the bootstrap practices currently used by entrepreneurs in the United States. The author developed a survey instrument, which used earlier findings of research in Sweden as a point of departure, and modified it with the results of semi-structured “expert” interviews conducted with people such as accountants, bank officials, small businesses’ managers, and consultants (Winborg and Landstrom, 2001). It was necessary to change or exclude some bootstrapping methods used in the prior research for reasons such as the U.S. has no VAT tax mechanism, and the two nations do not have identical, commonly used, business practices. Seven bootstrapping methods were added to the original instrument, three techniques that did not apply in the U.S. were omitted, one issue was split into two queries, and four questions concerning subsidies were replaced by three inquiries about grants, incentives, or subsidies; but the majority of bootstrap methods appeared on both instruments. (See Table I.) The modified survey also gained information regarding businesses’ characteristics and data on the firms’ financial situation and practices as the original had. Three new questions were added to the survey to collect demographic data--gender, age and highest level of education--about the mangers of the small ventures.

A stratified random sample was drawn from the 2002 Illinois Industrial Directory and

the 2002 Illinois Services Directory, which contain detailed information about manufacturing and non-manufacturing enterprises in Illinois. Although regional differences in entrepreneurial activity can be great in the U.S., the Illinois sample was expected to be representative because the state’s entrepreneurial activity ranked as moderate on several scales compared to other U.S. states (Stevenson & Lundstrom, 2001). These Directories provided comprehensive coverage of firms from industrial

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groups including retail, wholesale, construction, manufacturing, services or consulting, transportation, and hotels and eating establishments. The strata were defined by the organization’s size, the number of employees, so that the sample matched the most recent censuses of Illinois businesses published by the U.S. Small Business Administration Office of Advocacy. The sample drawn included 1,500 businesses. The survey instruments were mailed with a cover letter that explained the purpose of the research in June 2002, to managers of independently owned businesses throughout Illinois that employed fewer than 100 persons. Data collection ended in August 2002. Of the 255 surveys returned, 248 were useable, which provided a response rate of about 17 percent. Fifty-four of the surveys, less than four percent, were returned as undeliverable or wrongly addressed.

Results

Drop-out analysis showed that the response rates were similar among size

categories of firms at 18 percent for those employing fewer than 10 persons, 16 percent for those with between 10 and 19 employees, and 15 percent for companies with 20 to 99 employees. The numbers of firms by size categories were 91 businesses employing fewer than 10 persons, 43 ventures with 10 to 19 persons on staff, and 52 establishments with 20 to 99 employees. Just over one-fifth of the respondents were retail firms, almost one-third were service providers; while wholesale, construction, and manufacturing were about 17, 16 and 9 percents respectively. Approximately half of the firms were located in rural or suburban area, and half were situated in urban environments. Sales ranged from under $100,000 to over $2,500,000 in 2001, but the majority of companies had over $1,000,000 in revenues for the year. This profile was consistent with the most recent survey of small businesses in Illinois.

Thirty-nine female and 209 male entrepreneurs gave usable responses to the

survey; and since health care, education, and social services businesses were excluded from the sample, this was a higher than expected rate of response from the female business owners. The 39 females made up 15.7 percent of the replies and only a 14 percent of the responses were expected to be from females. Just over 63 percent of the entrepreneurs were between 41 and 60 years of age, and almost 55 percent of them had some college-level education.

Some observations are possible about the choices the entrepreneurs made among

the bootstrap finance methods. No bootstrap finance techniques were reported to have a zero usage; but grants, subsidies and incentives, regardless of their source, showed the lowest participation rate by businesses. Prompt invoicing of customers was at the most often used with 239 respondents answering affirmatively. Over 96 percent of the U.S. respondents reported putting at least one technique into action, four other methods were used by more than 70 percent of the business owners, and six more approaches figured into between 50 and 70 percent of the entrepreneurs’ resource acquisition methods. Table II shows how frequently each bootstrap method was used. If the bootstrapping techniques are viewed by category, some additional insights are possible.

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The cash or asset management forms of bootstrap finance were by far the most

frequently used methods. This would be true for the variety of approaches as well as the number of respondents employing these methods. Customers or clients afforded the second highest tally for business owners as sources bootstrapped types of wherewithal. The third ranking went to the owners’ support of their businesses through varied personal assets or creditworthiness. Outsourcing routes to gain assets held the fourth most-favored place; and leases, the fifth at 59.3 percent reporting their use. A gap of almost 20 percentage points lies between leases and barter, which was favored by 93 of the respondents. Cooperative resources were employed by just over a quarter of the businesses; and few entrepreneurs chose subsidies, incentives, or grants.

Implications

Many questions remain to be tested within the field of bootstrap finance. Situational modifying factors, such as life-cycle stage, industrial classification, business location, and growth prospects, may have strongly influenced the level of or choice among the bootstrapping techniques used. Research on the relationships within families, both nuclear and extended, could be productive because of nature of some of the bootstrappers’ techniques. This would especially be true for issues that would include concepts such as social capital, social contracting, and trust’s being pivotal for understanding and implementing some forms of bootstrap financing (Winborg and Landstrom, 2001). Insight into these and other related topics could improve the function of entrepreneurial ventures.

Getting the most utility from resources has been a long-standing objective among

economists, financiers, and entrepreneurs. With improved effective deployment, the same resource base can be managed to realize higher profits, to facilitate more job creation, to allow for higher profits and wages, and to develop businesses and properties to their full extent. Some of the better-suited tools to accomplish these goals may be bootstrap financial techniques that occasionally have been departures from common institutional methods (Stevenson and Harmeling, 1990).

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Table I. Bootstrap Financing

Category Sources Owner’s Resources Savings Accounts Sale of Securities: Stocks, Bonds, CD, etc. Sale of Real or Personal Property Forgone Salary, and Salary from “Other” Job Residence Use as Office or Shop Owner’s Borrowing Installment Loans, Personal Lines of Credit, and Signature Loans Credit Cards, and Micro Lending Programs and Agencies Franchise Lending Collateralized Lending, and Mortgages or Home Equity Loans Whole Life Insurance Cash Value Personal Retirement Accounts Withdrawals On-Line Credit Search Matching Services Relationship Resources Cash Contributions, and Property and Equipment Purchases Donated Labor and Expertise, and Below-market Salary Barter Service or Goods Exchanges and Trades Organized Service or Goods Exchanges Quasi-Equity Partnerships Individual or Group Angels, and Adventure Capitalists Incubators’ Interest, and Credit Enhancements Cooperation Resources Equipment and Facilities Sharing or Borrowing Joint Ownership or Partnering Coordinated or Pooled Purchases, and Customer-sharing Alliances Franchisee Support, Advising, and Services Customer or Client Financing Prepaid Licenses or Royalties, and Advance Payments Customer-Funded Research and Development Letters of Credit, and Invest-omers Cash or Asset Management Trade Credit, Delayed Payments to Vendors, or Deferred Taxes Float, Overdraft Privileges, Account Transfers, and Skip Loans Accelerated Receipts from Customers or Clients Short-term Investments of Excess Funds Inventory Minimization, and Used versus New Equipment Purchases Theft Control Leases Closed- and Open-ended Leases, and Sales and Leasebacks Venture Leasing Outsourcing Professional Services, and Temporary Employees Manufacturing Co-ops, Flexible Networks, or Virtual Corporations Subsidies and Incentives Direct and Indirect Municipal or County Funding Direct and Indirect State or Federal Funding Direct and Indirect University Resources Indirect “Big” Corporate Foundation Grants Direct Grants, and Flow Through Arrangements

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Table II. Use Frequency of Bootstrapping Techniques Bootstrap Method Number Percent Owner’s Resources or Borrowing: Use Private Credit Card 147 59.3

Give Up Personal Salary 140 56.5 Use Salary from Another Job 35 14.1 Run Business at Home, Partially 34 13.7 Run Bus at Home, Completely 23 9.3

Relationship Resources:

Loans from Relations 41 16.5 Hire Relations at Low Wages 37 14.9

Barter: Barter 93 37.5 Cooperation Resources: Borrow Equipment 65 26.2 Have Consignment Goods 64 25.8 Use Pooled Purchases 53 21.4

Beta Test Site for Equipment 50 20.1 Share Space with Others 35 14.1 Share Equipment 21 8.5 Share Employees 18 7.3

Customer or Client Financing: Require Down Payments 170 68.6 Be Included in Clients’ Promotional Materials 103 41.5 Clients Pay Product Development Costs 63 25.4 Cash or Asset Management: Invoice Promptly 239 96.4

Buy Used Equipment 191 77.0 Minimize Inventory 189 76.2 Stop Service to Late Payers 182 73.4 Give Preferences to Quick Pay Customers 178 71.8

Delay Payment to Suppliers 126 50.8 Pay Early to Get Discounts 115 46.4 Charge Interest on Over Due Accounts 103 41.5 Offer Discounts for Cash 100 40.3 Factor Inventory 27 10.9 Delay Pay Day to Employees 15 6.0 Factor Accounts Receivable 14 5.7

Leases: Lease Equipment 141 56.9 Outsourcing: Have Temporary Employees 147 59.3 Receive Free Consulting 30 12.1 Subsidies and Incentives: Acquire Government Grants 13 5.2

Arrange Corporate Grants 1 0.4 Foundation Grants: Win Foundation Grants 3 1.2

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References

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