Small businesses can do without external funding

Lovemore T. Chipunza Correspondent
The world over one of the most common challenges faced by entrepreneurs is lack of access to finance.

This complex problem is driven by a multiplicity of factors, including high risk perceptions by financial institutions, as well as limited government support.

Many governments have brought partial solutions to this barrier to growth, and survival of small businesses by creating different support structures.

In Zimbabwe, the Government attempted to address this challenge by establishing a ministry specifically responsible for dealing with issues of small businesses.

In addition, the Government established the Small and Medium Enterprise Development Corporation (SMEDCO) formerly SEDCO whose mission is to champion economic growth by promoting and developing micro, small and medium enterprises through delivery of customer focused financial and business extension services. Furthermore, the Reserve Bank of Zimbabwe recently enunciated the need for financial institutions to reduce lending rates especially to small businesses.

Despite all these initiatives, small businesses in Zimbabwe have limited access to funding. The facts are that (i) financial institutions are sceptical to support small businesses. This is evidenced by financial institution’s demand for collateral and lending rates which the majority of small businesses (survivalist entrepreneurs) cannot afford, (ii) SMEDCO is dormant and one wonders whether it still exists and (iii) the limited financial support to small businesses by financial institutions creates an unbanked community as there is no relationship between the two.

Despite these financial constraints, small businesses in Zimbabwe continue to increase in number. Small businesses play an important role in addressing the challenges of unemployment, poverty alleviation and economic development. The question that then arises and is directly posed to stakeholders such as the government, financial institutions and SMEDCO is, “how do small businesses balance the two contrasting imperatives?”

What can be said is that small businesses tend to pursue other funding options that allow them to fulfil their role of economic and social development. Based on their numbers and contribution to the Zimbabwean economy, it is believed that small businesses cope with problems requiring finances without much support from external funding.

Thus, it can be argued that, besides external funding, small businesses’ survival is buttressed on alternative financing options — a process referred to as bootstrap financing.

Bootstrap financing

Literature denotes that in situations where entrepreneurs are faced with a challenge of accessing external funding, they may tap into other informal sources of finance, instead of relying solely on financial institutions and government agencies for capital.

This type of financing, called “bootstrap financing” is available to virtually every small business and includes a combination of social and economic transactions. Bootstrapping refers to “highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from sources,” such as financial institutions. Put in another way, bootstrap financing can be defined as “a collection of methods/techniques used to minimise the amount of outside debt and equity financing needed from banks and investors”. Examples of these methods include sharing of business space, selling of consignment stock, use of contract instead of permanent labour and deliberate delays in paying creditors as well as salaries and wages which are usually below market rate. It also encompasses the use of own savings in business start-ups as well as managing the business frugally.

There are two broad categories of bootstrap financing techniques, namely raising finance without using banks or equity and gaining resources without the need for finance.

Techniques for raising finance (cash enhancement) include using a personal credit card, seeking advance payments, speeding up invoicing, selling on cash and loans from family and friends.

Bootstrapping techniques for accessing other resources include sharing or borrowing equipment, hiring temporary employees, sharing premises/employees as well as obtaining knowledge, skills and emotional support from family and friends.

Hence, bootstrap financing techniques are widely applied as essential ingredients for small business growth and development.

Benefits of bootstrap financing

Small businesses prefer to use bootstrap financing in running their businesses, because it is generally easier to access and is convenient. Bootstrap financing is non-bureaucratic and does not require a formal business plan or collateral. The strategy also enables easier management of cash flow as well as the business.

Success stories of bootstrap financing

Most studies on bootstrap financing were done in developed economies where the use of bootstrap financing techniques has 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, Lillian Vernon and Hewlett-Packard. Each of the three men put $800 from their savings into the launch of Roadway Express, which has now 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. The Hewlett-Packard Company was paid in advance by their first customer.

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.

A study by Chipunza and Chipunza (2012) on the influence of selected demographic variables on the choice of bootstrap financing methods among small owner-managers in Zimbabwe revealed that 78 percent of small businesses never accessed money from banks or other financial institutions. Nevertheless, the majority are surviving and growing.

Arguably, bootstrap financing has become a strategy for survival for small businesses given the high lending rates and liquidity challenges that are prevailing in the Zimbabwean economy. In summary, a typical informal sector survives on some of the following: cash transactions, shared premises, two in one businesses (a newspaper vendor also sells airtime, a retail shop is now also an EcoCash agent), relatives and friend are employed at non-market value wages and are unbanked. Admittedly, bootstrap financing has become the trump card (muti) for growth and survival for most small businesses in Zimbabwe. Notable examples include Close Gap Africa and Econet. Four blood brothers used their savings ($2 000), knowledge and experience to start a training and mentoring business, which is now regarded as the hub of training and mentoring in the SADC region. In February 1996, Econet had to ask its creditors to defer payment as its coffers were fast dwindling due to endless court battles as there was no revenue. Econet’s salvation was a $10 000 advance payment by its first customer. These bootstrap financing techniques led the founder of Econet to realise the mantra that “integrity is better than money”.

Bootstrap financing by large corporates

In view of the unfavourable business operating environment in Zimbabwe, it is becoming evident that bootstrap financing is no longer the province of only small business but has also been adopted by large corporates. The punitive lending rates coupled with scepticism of both local and foreign direct investors in injecting fresh capital, have transferred the “heat” to large corporates to also make use of bootstrap financing. For example, companies in the hardware and supermarket businesses are, unlike before, now relying on consignment stocks.

Instead of borrowing from external funders, some universities in Zimbabwe are now enrolling two intakes per year as a way of raising internal and cheap funds to pay essential obligations that include salaries and wages. The Government has also joined the bootstrap bandwagon as evidenced by the recalling of all qualified teachers, who were on leave at the beginning of the first term of 2016.

Dr Lovemore T Chipunza researches on SMMEs and advises entrepreneurs. He is a motivational speaker on entrepreneurship, with a Doctorate in Business Administration from the Central University of Technology, South Africa. For Feedback e-mail: [email protected] or [email protected]







Suffice to say that government coffers are dwindling at a time when access to external funding like the International Monetary Fund is limited. It can therefore be argued that the concept of bootstrap financing is no longer confined to small businesses but also applicable to large corporates including the government. In essence, bootstrap financing fosters survival and growth in times of limited access to external funding. It is unfortunate that a number of large corporates closed without testing the bootstrap financing concept. However, it is not too late for the surviving corporates and government to adopt the concept of bootstrap financing.


While bootstrap financing has taken small businesses this far, complementing this strategy with external funding could further boost the sector’s growth and expansion. Unless and until financial institutions revisit their lending strategies and align them with the needs and expectations of small businesses, their relevance and survival will remain threatened. The economy has gone informal and as such the informal sector holds abundant cash resources.

Dr Lovemore T Chipunza researches on SMMEs and advises entrepreneurs. He is a motivational speaker on entrepreneurship, with a Doctorate in Business Administration from the Central University of Technology, South Africa. For Feedback e-mail: [email protected] or [email protected]

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