Question

A. Sometimes an entrepreneur may be frustrated with attempts to find appropriate start up capital but a method of financing a business with a little or no capital is called “ Bootstrap”
Using an example from an organization of your choice, explain the ways to bootstrap one business.

B. Raise the main demerits of using debt finance to finance a startup business

Answer 1

a) BOOTSTRAPING: It can be defined as a process of using a little amount that you have for starting up a business.

Ways of bootstraping a business

1. Use savings as capital: To make sure that you dont borrow money or funds from anywhere just use your savings and deposits as capital in the business.

2.Work from home: Start your work from home itself as it will save a huge amount of money like the rent of office space which becomes quite expensive and later on when you start making money , you can buy your own space and start the work over there.

3.Make partners: Try to make partners so that they can invest in the business as it will help in reducing the load of funds and also get help from partners in order to set up and expand the business as it becomes difficult for a single person to manage the entire startup.

4..Cut your expenses: Try to cut down as much expense you can like use home in place of office to save the amount of rent, in this manner you will be able to save some amount.

5. Try to make business online: Online business saves a huge amount of money as all you need is just a PC with a good internet connection. So you shall try to incorporate your business onilne to avoid unnecessary costs.

eg: Suppose a person wants to start teaching business, he can start bootstraping in order to save amount, like he can use online sources of teaching by making blogs in the beginning rather than building a coaching centre, once he starts making income online, he can start the offline business.

b) DEBT FINANCING: It can be defined as a method of financing a business by borrowing money or taking loans and promising the lender to repay it.

Demerits of using debt finance to finance a startup business

1. Repayment: No matter you are earning profit or loss, you have availed a loan, you are supposed to repay the loan anyhow.

2. Credit rating: When an owner of some business borrows the amount , his credit rating is affected by his repayment. If he delays in repaying ,his credit rating goes negative which makes it difficult for him to borrow again.

3.High interest rates: Along with the principal amount you borrowed , you are supposed to pay the interest which makes it a huge amount and difficul to repay as well.

4. Collateral: For the lenders to be secure about their money, they demand some kind of security or guarantee to make sure that their amount will be repayed with full interest at particular time.