Determinants of Bootstrap Finance used by Textile Based Small Scale Units in Madurai District

Abstract

The present study aims at examining how the problem of under-capitalisation has been solved by some small entrepreneurs. It provides an insight into the use and the importance of bootstrap finance utilised by the textile based small scale units set up in Madurai District of Tamil Nadu and the factors determining it. Technical and managerial talents are the prerequisites for a successful entrepreneurial venture. A successful entrepreneur employs productive resources with prudent financial planning to earn a higher return on capital (Leibenstein 1973; Broadly Joseph 1969; and Schumpeter 1961). Proper credit management ensures effective production planning as finance is one ofthe basic foundations of all economic activities. An entrepreneur as a financial manager will have to gather maximum information about the various sources of funds to ensure smooth, continuous and efficient functioning of the business. But mobilisation of financial resources is one ofthe most difficult tasks for a small entrepreneur. Owners of the small scale enterprises are not that much experienced to have access to capital market. Further, they find it near impossible to elicit adequate information about financial alternatives as a result of which their firms are very often undercapitalised (Van Auken 2000). The available literature reveals that small scale enterprises meet the challenges of capital mobilisation through bootstrap financing methods (Van Auken and Neeley 1996). The theory points out that the ability to successfully raise bootstrap finance is also a characteristic of being entrepreneurial (Van Auken 2000). Bootstrap financing is a way of mobilising financial resources without borrowing money or raising equity financing from routine sources (Freear, Sohl and Wetzel 1995). It is a complement to the routine sources of capital to fill up the financial gap (Gibson 2000). Moreover, it is useful when the routine sources are reluctant to commit funds to these small scale enterprises. This method of financing enjoys the advantage that it does not require any collateral security. This technique of financing includes delay in tax payment, buying used equipments, use of personal credit cards, obtaining advance payments from the customers and so on. The available literature also reveals that the use of bootstrap finance is determined by a wide variety of internal and external factors. Van Auken and Neeley (1996), for example, have found that the firm’s type and its size determine the need for bootstrap finance positively. In this context the present analysis was made by administering a pre-tested interview schedule and fitting a discriminant function to gain insight into the importance of bootstrap finance utilised by the textile based small scale units set up in the study area and the factors determining it.