STRA TEGF

AN EMPIRICAL INVESTIGATION OF
BOOTSTRAP FINANCING AMONG SMALL FIRMS

Howard Van Auken, Ph.D.
Iowa State University
vanauken@iastate. edu

ABSTRACT

This study examines the use of 27 bootstrap financing methods among a sample of 97 small
firms. Owners 'ankings of the importance suggested that bootstrap financing was not central
to their firms'inancbig strategy. Owners who had greater di/jiculty of raising capital ranked
bootstrap financing methods that (I) slowed disbursemenis, (2) generated cash, and (3)
subsidized operations as being more important than owners who experienced less difficulty in
raising copital. Owners who believed their firms were more undercapitalized ranked
bootstrap fiiiancing methods that (/) slowed disbursements, (2) generated cash, and (3)
minimized investment as being more important than owners who experienced less di/ficulty in
raising capital. The use of bootstrap financing was also directly related to the risk of the firm.
The results can be used by owners of small firms, consultants, aml support agencies that
provide assistance to small firms in areas of financial planning and capital acquisition.
Untlerstanding the use and availability ofall sources of capital will enable owners to obtain a
comprehensive understanding of capital alternatives and financial strategies. Agencies that
provide support services can use the information to better assist small firms in developing
finoncing strategies. This information could easily be built into training programs for both
new aml existing small businesses.

INTRODUCTION

The acquisition of capital is one of the most important issues faced by small firms (Ang,
1992a). Capital acquisition is also a time consuming, frustrating, and difficult challenge
confronting business owners. Without the appropriate level and combination of capital, a
company's financial viability will be threatened. A weak financial structure can result in poor
operating performance and, ultimately, failure (Timmons, 1999). Adequate capitalization can
enable owners of small firms to pursue market opportunities and reduce the personal stress
associated with operating a business (Gersick, Davis, Hampton, gz Lansberg, 1997).

Much of the theory of finance assumes that a firm's capital acquisition strategy should
achieve an optimal capital structure that maximizes wealth. This theory of capital structure,
however, relies on specific assumptions that are not relevant for most small firms. Owners of
small firms, for example, lack information about capital alternatives and access to capital

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Journal ofSmall Business Strategy Vol. /4, No. 2 Fall/Winter 2003

markets (Holmes & Kent, 1991). The lack of information about and access to capital markets
results in small firms having either a sub-optimal structure or being under-capitalized (Van
Auken, 2000).

Many small firms cope with the challenges of capital acquisition through bootstrap financing
methods (Van Auken & Neeley, 1996). A wide variety of bootstrap financing techniques are
available for business owners, including for example use of credit cards, delaying tax
payments, sharing equipment and employees with other businesses, an leasing. Freear, Sohl,
and Wetzel (1995) defined bootstrap financing as "highly creative ways of acquiring the use
of resources without borrowing money or raising equity financing from traditional sources."
Bhide (1992) believed that the true entrepreneurial spirit is often demonstrated in the business
owner's ability to creatively find and use bootstrap financing. Bootstrap capital provides
financing alternatives to small firms that are confronted with the lack of access to traditional
sources of capital. Winborg and Landstrom (2001) and Gibson (1992) referred to small

firms'ifficultiesassociated with capital acquisition in the context of a "financing gap ." Bootstrap
financing methods help provide capital to fill this financing gap when traditional sources of
capital are not available.

The purpose of this paper is to present the results of a study that examined small firm's use of
bootstrap financing methods. Specifically the paper examines the relationship between the
ranking of importance of bootstrap financing among owners of small firms and (I)

owners'ssessment

of the difficulty of capital acquisition, (2) owners'ssessment of the degree to
which the firm is undercapitalized, (3) risk, and (4) organizational structure. Although a
common source of financing, few studies have investigated the use of bootstrap financing
among small firms. The use of bootstrap capital would be expected to be related to small firm
risk and organizational structure. Small firms that are more risky (including risks arising from
organizational structure), for example, may have greater difficulty in acquiring traditional
sources of finance and, thus, rely more heavily on bootstrap financing methods than firms that
are less risky.

The next section of this paper reviews the literature on the financing of small firms, especially
previous research related to small firm financing. Section IH presents the methods used in the
analysis. Section IV discusses the results of the analysis. The last section provides the
summary, implications, and suggestions for further study.

SMALL FIRM FINANCING

Beginning with Tobin's (1958) separation theory and Modigliani and Miller's (1958) theory of
capital structure, much of finance theory is based on the assumptions of capital market theory.
The financial theory of capital structure posits that owners should select a financing mix that
minimizes the firm's overall cost of capital by identifying the optimal levels of equity and
debt capitaL One of the basic tenets of finance theory is the assumption that all firms have equal
access to and are able to fully participate in the financial markets with similar competitive
positions. The acquisition of capital by small firms may not be consistent with wealth
maximization due to numerous constraints that limit their access to the capital markets (Petty
& Bygrave, 1993; Ang 1992b). Complex objective functions, market imperfections, and
agency relationships are major distinctions that detract from the application of finance theory to
small firms (Ang, 1992a; McMahon, Holmes, Hutchinson, & Forsaith, 1993). For example,
small business owners may include business and personal goals, may not have complete
information about or access to capital markets, and experience obstacles due to high monitoring
costs, bonding costs, and residual loss. As a consequence, small firms often rely on a different
set of financing sources relative to large firms.

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Journal ofSmall Business Strategy Voh IE No. 2 Fall/Winter 2003

Traditional sources of capital include funds from personal savings and borrowing from financial
institutions. Entrepreneurs who are unable to raise adequate amounts of capital from traditional
sources commonly raise additional capital from bootstrap financing sources. Bootstrap capital,
or alternatives to traditional sources of financing, is often important through all stages of a firm's
life (Van Auken & Neeley, 1996;Thome, 1989). Freear, Sohl, and Wetzel(1995) and Petty and
Bygrave (1993)noted that bootstrap financing methods are especially important source of funds
for rapidly growing companies.

Bootstrap financing often has the advantages of being easy to obtain (i.e, credit cards) and
convenient(i.e. loans from life insurance), and having minimal requirements (i.e. home equity
loans). In addition, bootstrap sources of financing commonly do not require a business plan or
collateral. Disadvantages associated with bootstrap financing may include, for example, higher
cost (i.e. loans from public financing companies) and loss of ownership control (i.e. venture
capital). The availability of bootstrap financing may also result in the funding of firms that are
not viable, especially if traditional sources of capital are unwilling to commit funds to the
business.

Research on the use of bootstrap financing among small firms is limited. An early paper by
Thome (1989) pointed out that many companies obtain a considerable amount, often all, of
their financing through bootstrapping. The dynamic nature of the acquisition of bootstrap
finance suggests that all methods may not be documented. Bhide (1992) emphasized that use
of bootstrap financing methods requires a different approach than used for the acquisition of
traditional sources of capital. Becoming operational and reaching breakeven quickly,
conserving cash, and growing slowly provide strong support of a financing strategy that relies
on bootstrap linancing. Winborg and Landstrom (2000) identified six clusters of bootstrap
financing methods (owner and relatives, management of accounts receivable, sharing and
borrowing resources among businesses, delaying payments, minimization of investment, and
subsidies) among firms in Sweden. An empirical study by Van Auken and Neeley (1996)
indicated that firm characteristics (form of legal organization and type of firm) affected the
use of bootstrap financing. Sole proprietorship and firms requiring high capital investment
relied on bootstrap financing to a greater extent than other firms.

SAMPI.E, QUESTIONNAIRE DEVELOPMENT, AND METHODOLOGY

Sample and Questionnaire Design

The sample consisted of 185 small firms located in a Midwestern state. Sample firms were
obtained from listing of chambers of commerce. A questionnaire was developed and pre-
tested during the Fall, 2001. The first and second mailings of the questionnaire occurred
during Spring, 2002. A total of 91 questionnaires were returned, providing a response rate of
49. 1%.

The questionnaire collected information on the (I) use and importance of bootstrap financing
among small lirms and (2) relationships between owners'ankings of importance and (a)
owners'ssessment of the difficulty of raising capital, (b) owners'ssessment of their

firms'egree

of undercapitalization, (c) firm risk, and (d) organizational structure.. The
questionnaire was segmented into three sections. The first section asked questions about the
characteristics of the business, including age, type of business (product, service, consulting,
other), ownership (sole proprietorship, partnership, S-Corp., Corporation, and Limited
Liability Corporation), total capital raised since business started (&$ 100,000; $ 100,001-
$500,000; $500,001-$ 1,000,000; $ 1,000,001-$5,000,001; and &$5,000,000). and market area
served (local, regional, national, international) . The second section asked respondents to rank
the importance of 28 methods of bootstrap financing using a Likert scale(0=never used,

24



Journal ofSmall Business Strategy Vol. l4, No. 2 Fall/Winter 2003

1 =seldom used and 5=frequently used). The Likert scale and methods of bootstrap financing
were adopted from Winborg and Landstrom (2000). The third section of the questionnaire
asked respondents to assess the extent to which their company is undercapitalized (1=very
undercapitalized and 5~at undercapitalized) and questions related to the owners'xperience
and efforts associated with capital acquisition.

METHODOLOGY

The data was initially summarized using univariate statistics (means and frequencies) to
provide a better understanding of the respondents and characteristics of the data. The initial
summary statistics included those relating to demographic information and the means
rankings of importance of the various bootstrap financing methods.

The sample was segmented and evaluated using two different criteria. First, the sample was
segmented into two groups according to the owners'anking of undercapitalization
(undercapitalizedr rankings of 1 or 2; not undercapitalizedaankings of 4 or 5). A Wilcoxon 2-
sample test of difference in means compared the mean rankings of importance of the bootstrap
financing methods for the two sample segments. The purpose of the difference in means tests
was to identify significant differences in the importance of the alternative bootstrapping
methods between owners who ranked their firms as being undercapitalized versus owners who
ranked their firm as not being undercapitalized. Second, the sample was also segmented into
firms who owners ranked capital acquisition as being difficult and owners who ranked capital
acquisition as not being difficult (difficult rankings of 1 or 2; not difftcul~anking of 4 or 5).
A Wilcoxon 2-sample test of difference in means compared the mean rankings of the
bootstrap financing methods for the two sample segments. The purpose of the difference in
means tests was to identify significant differences in importance of bootstrapping methods
between owners who owners ranked capital acquisition as being difficult versus owners who
ranked capital acquisition as not being difficult.

The rankings of importance of all bootstrap financing methods were averaged. Logit
regression analysis was subsequently used to determine the relationship between the

owners'anking

of importance of bootstrap financing and (1) risk proxy, (2) organization structure, (3)
type of business activity, (4) ln (age of firm in years), and (5) ln (total capital raised since firm
was launched). The ln (business age in years) and ln (total capital raised since business was
launched) were used as control variables.

The risk proxy used in the study was a combination of the owners'ssessment for difficulty of
raising capital (loot difficult and 5=difficult), degree of undercapitalization (lrnot
undercapitalized and S~ndercapitalized), growth objectives (I=low growth and 5=high
growth), and limits on growth due to lack of capital (1~o limit on growth and 5=severe limit
on growth). All of these variables would be expected to be related to the risk of the firm. For
example, firms that exhibit greater risk would be expected to have greater difficulty of raising
capital, have higher growth objectives, have growth opportunities that are limited due to lack
of capital, and be more undercapitalized. The correlations of all four of the variables were
highly and significantly related.

Spearman correlations (shown in Table II) between the independent variables in each equation
were calculated to assess significant relationships between the variables. Since no significant
correlations between the independent variables are present, multicollinearity should not have
been a problem.

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Journal of Small Business Strategy Vol. 14, No. 2 Fall/Winter 2003

Bootstrap Financing = att + bi (Risk Proxy) + bi (Legal Structure) + bi (Type of Business)
+ b4 In (Age) + bi (Total Capital Raised)

where:

Bootstrap Financing = Mean Ranking of Importance of Bootstrap Financing Methods
Risk Proxy = (Difficulty of Raising Capital + Degree of Undercapitalization +

Growth Objectives + Limits on Growth Due to Lack of Capital)/4
Legal Structure = Type of Legal Organization (I = Sole Proprietorship and 2 =

Other)
Type of Business = Primary Activity of Business (I =Products Oriented Firm & 2 =

Other)
ln (Age) = ln (Business Age in Years)
In (Total Capital Raised) = In (Total Capital Raised Since Business Started)

RESULTS

Respondent Characteristics

Table I shows that the primary business activity of most firms (55.6'/o) was products. The
remaining firms fell into services (32.2'/v) and other (12.3'/0) categories. Approximately the
same percentages of firms were organized as S-corporations (40.7%) and C-corporations
(39.6'/v). The remaining firms were organized as sole proprietorships (6.6'/o), partnerships
(4.4%), and limited liability companies (8.8'/0). Approximately 43.0'/v of the firms served a
local market, 14.0'/0 served a regional market, 16.1/0 served a national market, and 26.8/o
served an international market. Approximately one-half of the firms raised less than $500,000
of total capital since business launch (32.2'/n less than $ 100,000 and 16.7% of the respondent
firms raised $ 100,000-$500,000). Of the remaining firms, 18.9'/o raised $ 500,001-$ 1,000,000
and 31.2'/o raised more than $ 1,000,000. Approximately 22.8'/v of respondent firms are less
than 6 years old, 18,5% are 6-10 years old, 14.9'/n between 10-15 years old, and 43.3'/n more
than 15 years old.

Percentage of Use and Mean Rankings of Bootstrap Financing

Table II shows the percentage of firms using and mean rankings of importance of each
bootstrap financing method. Table Il shows several general patterns. First, the percentage of
firms using the bootstrap financing techniques is closely related to the mean ranking of
importance. Bootstrap financing methods used the most were also ranked as being the most
important. Bootstrap financing methods that were used the least were also ranked as being the
least important. This result may not be surprising since owners probably consider those
financing sources that they use to be relatively important.

Second, some bootstrap financing methods were much more important in terms of use and
ranking than other methods while other methods had very low use and mean ranking of
importance. Third, almost all methods of bootstrap financing were ranked relatively low in
terms of importance. The average ranking of 12 of the 27 bootstrap financing methods was
less than 1.0. None of the average rankings of importance was greater than 4. Only two of
the average rankings were above 3.0.

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Journal ofSmall Business Strategy Vol. /4, No. 2 Fall/Winter 2003

Table I - Percentage of Sample Firms by Category
(n&0)

Category Percentage of Firms
Type of Firm

Products 55.6
Services 32.2

Consulting 5.6
Other 6.7

Type of Legal Organization
Sole Proprietorship 6.6
Partnership 4.4
S-Corporation 40.7
Corporation 39.6
Limited Liability Company 8.8
Market Size
Local 43.0
Regional 14.0
National 16.1
International 26.8

Total Capital Raised
&100,000 32.2
100,001-500,000 16.7
500,001-1,000,000 18.9
&1,000,000 31.2

Age of Firm
& 6 years 22. 8
6-10 years 18.5
11-15 years 14.9
& 15 years 43.3

The bootstrap financing techniques that had the highest mean ranking of importance were
negotiate best payment terms with suppliers (3.59), buy used equipment (2.13), offer same
terms to all customers (2.93), use routines to minimize capital investment (2.14), and speed-up
invoicing (2.36). These were the only bootstrap financing methods that had a mean ranking of
importance of greater than 2.0. The five bootstrap financing methods ranked lowest were
factor accounts receivable (0.10), delay tax payments (0.31), obtain loans from
friends/relatives (0.38), share employees with other businesses 0.40), run business from home
(0.45), and share equipment with other businesses (0.47). The most surprising of these lowly
ranked bootstrap financing methods was obtaining loans from friends/family. Although a
financing method often cited as an important source of capital for small firms, loans from
friends/family was infrequently used and a relatively unimportance as a source of financing.

Bootstrap Financing Methods and DiAiculty of Raising Capital

Table III shows the results of a Wilcoxon 2-sample test of difference between the
owners'ankingsof the difficulty of raising capital (D=difficult and NDr not diAicult) and rankings of

bootstrap financing methods. The table results show several patterns. First, the mean
rankings of importance of most bootstrap financing methods (20 of the 28 methods) are not
statistically different relative to the owners'ankings of the difficulty of raising capital.

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Journal of Small Business S/ra/egy Vol. /4, No. 2 Fall/Winier 2003

28 D= 1 0.75
Buy on Consignment from Suppliers

28 D= 1 0.68
Employ Relatives/Friends at Below-Market Salary

45 ND=2 0.49
28 D=1 0.71

Share Equipment with Other Businesses
45 ND=2 0.31
28 D= 1 0.68

Run the Business Completely in the Home
45

28 D= 1 0.50
Share Employees with Other Businesses

45 ND= 2 0.24

28 D= 1 0.71
Obtain Loans from Relative or Friends

45 ND=2 020n
28 D= 1 0.64

Deliberately Delay Tax Payments
45 ND = 2 0.16 un

28 D= 1 0.14
Raise Capital from a Factoring Company

45 ND=2 0.09

The table also shows that the owners'ankings of eight of the bootstrap financing methods
(deliberately delay payment to suppliers, withhold salary when necessary, borrow equipment,
obtain payment in advance from customers, rely on income from outside employment, obtain

loans from relatives/friends, employ relatives/friends at below-market salary, and deliberately

delay tax payments) are significantly different relative to the rankings for difficulty of raising
capital. These eight bootstrap financing methods were ranking as being more important to
owners who experienced relatively greater difficulty raising capital than owners who

experienced relatively less difficulty in raising capital.

These results provide insight into how owners of small firms use bootstrap financing as they
adapt their financing strategies to difficulties in capital acquisition. The eight methods can be

grouped into three categories: (1) delaying payments (deliberately delay payment to suppliers,
deliberately delay tax payments, withhold salary when'necessary); (2) generating cash (obtain
payment in advance from customers, rely on income from outside employment); and (3)
subsidizing (borrow equipment, obtain loans from relatives/friends, employ relatives/friends

at below-market salary). Owners who experience difficulties in capital acquisition
incorporate bootstrap financing into their financial strategies by delaying payments on

accounts, generating additional cash, and taking actions that subsidize operations. All of these
bootstrap financing methods have a positive effect on the firm's cash flow.

Bootstrap Financing Methods and Degree of Vndercapltallzatlon

Table VI shows the results of a Wilcoxon 2-sample test of difference between the
owners'ankings

of the degree of undercapitalization (Vr undercapitalized and NUr not
undercapitalized) and importance of the alternative bootstrap financing methods. The table
results provide insight into the relationship between how owners adapt to undercapitalization
through the use of bootstrap financing. Several patterns are evident from the table. First,
owners reporting a high degree of undercapitalization did not rank the importance of 16 of the
28 alternative bootstrap methods differently than owners reporting low degree of
undercapitalization. The owners'ssessment of the importance of these 16 methods of
bootstrap financing was not different relative to their assessment of the degree of
undercapitalization.

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Journal ofSmall Business Strategy Vol. 14, No. 2 Fall/Winter 2003

Table VI - Financing Methods vs. Degree of Undercapitalization:
Wilcoxon 2-Sample Test of Difference in Means

Degree of
Undercapitlization

Financing Method N (U=Vndercapitallze
R

Mean

d and NU=Not
Ranking

Undercapitalized)

21 V= I 3.86
Negotiate Best Payment Terms with Suppliers

55 NU= 2 3.51
Offer the Same Conditions of all Customers 20 U= I 2.85

52 NU=2 3.00
21 U= I 2.24

Speed up Invoicing
55 NU=2 2.33
18 U= I 2.67

Vse Routines to Minimize Capital Invested
51 NU=2 2.08

Buy Vsed Equipment Instead of New 22 U= I 2.68
Equipment 55 NU =2 1.80

'1

U= I 2.57
Lease Equipment Instead of Buying

55 NU = 2 1.65 *

Use Personal Credit Card for Business 21 U= I 2.23
Expenses 55 NU = 2 1.62

21 U= I 1.62
Cease Business with Customers Who Pay Late

55 NU= 2 1.85
Hire Temporary Rather Than Permanent 21 U= I 2. 19
Personnel 55 NU = 2 1.40

21 U= I 1.90
Obtain Payment in Advance from Customers

55 NU = 2 1.35
21 U= I 2.38

Deliberately Delay Payment to Suppliers
55 NU = 2 1.09 v*

Deliberately Choose Customer Who Pay 21 U= I 1.67
Quickly 54 NU = 2 1.19

21 U= I 2.05
Withhold Salary When Necessary

55 NU = 2 p53 vn

21 U= I 1.81
Borrow equipment

55 NU = 2 p51 vn

21 V= I 1.86
Share Office Space with Others

55 NU = 2 0.49 v*

21 U= I 1.02
Use Interest on Over Due Customer Accounts

55 NU = 2 p 33nv

21 U= I 1.52
Rely on Income from Outside Employment

54 NU = 2 0.33 *n

20 U= I 1.15
Offer Customers Discount for Cash Payment

55 NU=2 0.69
21 U= I 0.57

Coordinate Purchases with Other Businesses
55 NU= 2

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Journal of Small Business Strategy Val. /4, No. 2 Fa/IIIVinrer 2003

Practice Barter Instead of Buying/Selling 20 V= I 0.50
Goods 55 NU = 2 0.58

21 U= I 0.86
Buy on Consignment from Suppliers

55 NU= 2 0.50
Employ Relatives/Friends Below-Market 21 U= I 0.71
Salary 55 NU = 2 0.38

21 V= I 1.10
Share Equipment with Other Businesses

55 NU=2 0.20 "
21 U= I 0.81

Run the Business Completely in the Home
55 NU=2 0.24
21 U= I 0.76

Share Employees with Other Businesses
55 NU=2 0.31
21 U= I 0.81

Obtain Loans from Relative or Friends
55 NU = 2 0.16 **
21 U= I 0.86

Deliberately Delay Tax Payments
55 NU=2 0.15

v'aise

Capital from a Factoring Company 21 U= I 0.19
55 NU = 2 0.00 *

The table also shows that the owners'ankings of twelve of the bootstrap financing methods
(buy used equipment instead of new equipment, withhold salary when necessary, deliberately
delay payments to suppliers, borrow equipment, use interest on over due customer accounts,
lease equipment instead of buying, relay on income from outside employment, obtain loans
from relatives/ friends, share office space, deliberately delay tax payments, share equipment
with other businesses, and raise capital from a factoring company) are significantly different
relative to'the owners'anking of the degree of undercapitalization. These bootstrap
financing methods were more important to owners who believed their firms were more
undercapitalized than owners who believed their firms were less undercapitalized.

These results provide insight into the use of bootstrap financing techniques in relationship to
undercapitalization. The twelve bootstrap financing methods that are different relative to the
degree of undercapitalization can be grouped into three categories: ( I) slowing disbursements
(withhold salary when necessary, deliberately delay tax payments, and deliberately delay
payments to suppliers); (2) generating cash (raise capital from a factoring company, charge
interest on over due customer accounts, rely on income from outside employment, and obtain
loans from relatives/friends) and (3) minimizing investment (buy used equipment instead of
new equipment, borrow equipment, lease equipment instead of buying, share office space, and
share equipment with other businesses). Through their positive impact on cashflow, use of all
of these methods would reduce a firm's need for capital acquisition. Owners who experience
undercapitalization incorporate bootstrap financing into their financial strategies by delaying
payments on accounts, generating additional cash, and taking actions that minimize
investment requirements. All of these bootstrap financing methods have a positive effect on
the firm's cashflow.

Logit Regression Analysis

Table V shows the results of the logit regression analysis that examined the relationship
between the owners'ankings of importance of bootstrap financing (dependent variable) and
(I) a risk proxy (independent variable), (2) organization structure (independent variable), (3)

32



Journal ofSmall Business Strategy Vof l4, No. 2 Fall/Winter 2003

business activity (independent variable), (4) ln (age of business in years) (control variable),
and (5) ln (total capital raised since firm launched) (control variable). The results indicate that
only the coefficient for the risk proxy is significant. Organizational structure, business
activity, and the control variables are not significantly related to the owners'ankings of
importance of bootstrap financing.

Table V - Logit Regression Results:
Degree of Bootstrap Financing vs. Risk Proxy, Organizational Structure,

Business Activity, ln (Business Age), and ln (Business Size)
(n=73)

Dependent Variable Independent Variable
Regression
Coefficient

Bootstrap Financing Risk Proxy 0.2026
'X= 102.99) Organizational Structure 0.0266

Business Activity - 0.1170
ln (Business Age) -13.6027
ln (Business Size) - 0.0703

e Significant at l%.

The positive coefficient for the risk proxy variable indicates that as risk increases, then the
importance of bootstrap financing also increases. Conversely, decreases in risk are associated
with decreases in the importance of bootstrap financing. The challenge of capital acquisition
would be expected to be positively associated with the risk of the lirm. Higher risk firms
would be expected to have greater difficulty in raising capital (especially from traditional
sources of capital) than lower risk firms. As a result, higher risk firms would be expected to
place a greater reliance on and consider bootstrap financing to be of greater importance than
lower risk firms. Lower risk firm would likely be better able to acquire capital from
traditional sources and, thus, be expected to rank bootstrap financing lower in importance than
higher risk firms.

The insignificant relationship between the owners'ssessment of the importance of bootstrap
financing and organization structure shows that the legal organizational form is not related to
the owners'ssessment of the importance of bootstrap financing. Bootstrap financing is
equally important to regardless of organizational form.

DISCUSSION

Availability of capital is a common theme in much of entrepreneurial and small business
research. Most research has been devoted to traditional sources of finance (i.e. acquisition of
debt and equity). Much less research has been devoted to understanding the use and
importance of bootstrap financing among small firms. Bootstrap financing is probably widely
used and, thus, an integral aspect of small firms'inancial strategies. Some types of bootstrap
financing (such as accounts payable) would be expected to evolve through normal business
operations. Other methods of bootstrap financing would necessarily be planned (such as
sharing office space and business equipment).

The acquisition of capital by small firms can be one of the most time consuming and
frustrating aspects of business ownership. Adequate and appropriate capitalization affects all
aspects of firm operations. The ability of the firm to compete and pursue opportunities is
directly affected by the availability of capital. Small firms that are viewed as being more
risky will undoubtedly experience greater challenges in capital acquisition than small firms

33



Journal ofSmall Business Strategy Vol. /4, No. 2 Fall/)Vinrer 2003

that are viewed as being less risky. One consequence of being more risky is that small firms
will likely use bootstrap financing methods to a greater extent than firms that are less risky.
Higher risk firms may experienced greater difficulty in acquiring traditional sources of capital
and, thus, rely to a greater extent on bootstrap financing methods than lower risk firms.

The results in this study provided several broad insights into the bootstrap financing. First,
the owners'se and ranking of the relative importance of bootstrap financing were similar.
The greater the usage among firms, the higher the ranking of the importance of the bootstrap
financing method Conversely, the lower the usage among firms, the lower the ranking of
importance of the bootstrap financing method. Second owners ranked the importance of
almost all methods of bootstrap financing relatively low.

Two financial issues that potentially affect the use of bootstrap financing are the
owners'ssessmentof the degree of (I) diAicutty of raising capital and (2) undercapitalization.

Difficulties associated with capital acquisition and undercapitalization may lead small
business owners to access a variety of sources of capital. One finding of this study is that the
eight bootstrap financing methods are ranked as being more important among owners who
believe that capital acquisition is difficult as compared to owners who believe that capital
acquisition was not difficult. These eight sources of bootstrap financing improve the small
firms'ashflow by delaying payments, generating cash and subsidizing firm operations. Each
of these eight bootstrap financing methods are ranked as being more a more important source
of capital among owners who believed that capital acquisition was difficult relative to owners
who believed that capital acquisition was not difficult.

Another finding of this study is that twelve bootstrap financing methods were ranked as being
more important among owners who believed that their firm was undercapitalized relative to
owners who believed that their firm was not undercapitalized. These twelve sources of
bootstrap capital improve cashflow by slowing disbursements, generating cash, and minimize
investment. The twelve bootstrap flnancing methods were ranked as being more a more
important source of capital among owners who believed that their firm was undercapitalized
relative to owners who believed that their firm was not undercapitalized.

The results also showed a direct relationship between owners'ankings of the importance of
bootstrap financing and a proxy used to assess the risk of the firm. Bootstrap financing was
ranked as being more important as the risk of the firm increased. Conversely, bootstrap
financing ranked as being less important as the risk of the linn decreased. Higher risk firms
would be expected to have greater difficulty in raising capital from traditional financing
sources and, thus, rely more on alternative, non-traditional sources of capital than lower risk
firms. The owners'ankings of the importance of bootstrap financing methods were not,
however, associated with organizational structure and the control variables.

CONCLUSIONS

This paper presents the results of a study that examined the use of bootstrap financing among
small firms. Acquisition of capital is a challenge facing all firms. The challenge of raising
capital is even greater among small firms due to their higher risk and lack of access to capital
markets. An inappropriate capital structure, a misunderstanding of the characteristics of the
financing instrument, or a lack of information about the availability of specific sources of
capital can result in sub-optimal capital structure and financial distress. Many small firms rely
on bootstrap financing due to the difficulty of capital acquisition, unavailability of traditional
sources of capital or, in some case, due the simplicity.

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Journal ofSmall Business Strategy Vol. /4, hlo. 2 Fall/Itrinter 2003

The results of the study have several implications. First, owners and managers of small firms
can gain insight into the potential for including bootstrap financing methods in their financial
strategies. Usage and rankings of importance of bootstrap financing methods can assist owner
and managers more completely understand alternative sources of capital that can be accessed.
Better and more complete information can help in the development of comprehensive primary
and contingent financial strategies.

The relatively low ranking of importance of most bootstrap financing methods may suggest
that owners may not understand or appreciate the potential usefulness of bootstrap capital.
Bootstrap financing can be used when other sources of capital are not available and as a
complement to traditional sources of capital. Some bootstrap financing methods, such as
negotiating the best payment terms with suppliers and speeding-up invoicing, can be quite
cost effective even if traditional sources of capital are available.

The results can be used by consultants and support agencies that provide assistance to small
firms in areas of financial planning and capital acquisition. Understanding the use and
availability of all potential sources of capital is important so that owners are able to explore
the ramifications of alternatives, develop contingent plans, and make informed decisions.
Providing information on all potential sources of financing will enable owners to obtain a
comprehensive understanding of capital alternatives and financial strategies. This information
could easily be built into training programs for both new and existing businesses.

The study has several limitations that provide avenues for potential future research. The
sample was collected from a single state located in the Midwest. Other studies that examme
similar issues in other regions of the country could provide comparative results. For example,
a large national study would enable results to be compared by region. The data was also
collected at a single point in time. A longitudinal study would provide evidence in the
changing pattern of information about entrepreneurs'earch for capital.

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Howard E. Van rluken is a Professor of Management iii the College of Business at Iowa
State University. His research interests are in the area of new venture financing. He was a
William J. Fulbright Scholar at the Instituto de Tecltnologico y de Estudios Superiores de
Monterrey (Mexico) in /989, a William J. Fulbiight Scholar at Masarykova Univeszity v Brne
(Czech RepubBc) in /994, and Visiting Professor at the Consortium International University
(Italy) in 2001. He has published over 50 r%rred articles and participated in
entrepreneurship programs in many foreign countries.

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