Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Bootstrapping

What it is:

Bootstrapping refers to the efforts of an entrepreneur to start a business using his own assets as the source of capital.

Bootstrapping can also refer to a highly-leveraged transaction when an investor acquires a controlling interest in a company, financing the transaction by using the assets of the company as collateral for the loan.

How it works (Example):

Entrepreneurs typically apply for a business loan from a commercial bank or seek funding from independent investors. An entrepreneur who risks their own money as an initial source of venture capital is bootstrapping.

For example, someone who starts a business using $100,000 of their own money is bootstrapping.

In a highly-leveraged transaction, an investor obtains a loan to buy an interest in the company. The investor uses the assets of the company they are about to purchase as collateral for the loan.

Why it Matters:

Bootstrapping frees the entrepreneur from having to pay interest on a loan or from having to share any potential profits with other investors. However, entrepreneurship involves significant risk. When personal funds are used to finance a new business, the person stands to lose not only the time invested but their own money as well.

Bootstrapping in leveraged transactions is extremely risky since the potential investor is using the company’s assets to service their loan.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...