Most upcoming entrepreneurs with bright business ideas struggle to raise the capital necessary for setting up, running, and expanding their businesses. Small business owners can generate capital either by partnering with potential investors (equity financing) or outsourcing it from lenders (debt financing) (Pinto, 1994). However, securing capital from these sources is not easy. Investors and lenders usually require a solid track record of a company before investing in it. Lenders usually require the company to provide tangible assets as a guarantor for the borrowed money. Commercial banks form the largest percentage of lenders. Not so many small businesses can meet these demands. Therefore, these entrepreneurs remain with limited options for securing capital; possibly internal financing (bootstrap financing).
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The financial industry has encountered massive challenges in the recent past resulting in credit crunches. Consequently, this has made it hard for entrepreneurs to raise capital from external sources. Another reason stems from the tightening of lending criteria by banks. In addition, venture capitalists and private investors have become more conservative. On the other hand, private companies have grown more cautious, and the issuing of stock remains viable to selected businesses with a proven track record (Parrino et al., 2012).
In general terms, small businesses have a small number of employees and realize low turnover. Such businesses seem to be owned by several shareholders or proprietors. Outsourcing capital from external sources like equity financing, venture capitalists, or private investors comes with some preset requirements. Such requirements include better management, steady growth, and fast cash flow. A majority of small businesses cannot fulfill all these requirements, making it hard for them to acquire capital from external sources. Raising capital through debt financing also proves to be challenging. Most banks have become extra cautious by lending out money at high-interest rates and shorter payments periods (Walker, 2007). Such financiers propel the small business owners to offer physical assets as forms of security. These demands prevent small business owners from accessing the intended finances.
Because of the difficulties involved in securing finances from outside sources, small business owners have to rely on internal methods of financing. Bootstrap financing is a cheaper way through which upcoming businesses can raise capital. Several methods can be employed including factoring, credit card, and leasing types of equipment and real estate. In addition, letters of credit from customers might prove essential when negotiating financial assistance from lenders.
The current business environment presents numerous challenges to upcoming businesses. Securing capital to start up, operate and expand business ventures tops the list of challenges for small business owners. Equity and debt financing procedures have prerequisites that derail upcoming business owners from accessing capital. Demands like outstanding track records, security in the form of assets, and high-interest rates on loans discourage small business owners from realizing their set goals. Therefore, upcoming business owners need to turn to bootstrap financing. This internal financing method assists small businesses to cut down the cost (MacLaney, 2009). Moreover, bootstrap financing allows small business owners to work without pressure as it would have been the case, should they have received funding from external sources (O’Berry, 2010). However, raising capital through internal financing might not be adequate to meet the business’s capital demand. Therefore, lending institutions and private investors should reevaluate their requirements to enable upcoming business owners to access capital.
MacLaney, E. (2009). Business Finance: Theory and Practice. Toronto: Pearson Education Canada.
O’Berry, D. (2010). Small Business Cash Flow: Strategies for Making Your Business a Financial Success. Milton, Australia: John Wiley & Sons.
Parrino et al., (2012). Fundamental of Corporate Finance. Milton, Auastralia: John Wiley & Sons.
Pinto, B. (1994). Debt or Equity: How Firms Choose in Developing Countries. Washington: World Bank Publications.
Walker, F. (2007). Money. California: H. Holt and Company.