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Introduction
Given the constraints that small firms face in acquiring financial capital (e.g. [47] Van Auken and Neeley, 1996; [18] Chaganti et al. , 1995), there has been a recent push to investigate bootstrapping, or methods for obtaining resources that collectively reduce the need for outside financing (e.g. [46] Van Auken, 2005; [48] Winborg and Landstrom, 2001). While research over the past few years has shed some light on bootstrapping behavior (e.g. [48] Winborg and Landstrom, 2001), there is still much that is not yet understood about when small firms are likely to utilize different bootstrapping methods and how these methods impact the firm ([16] Carter and Van Auken, 2005). Although some have touted bootstrapping as a proactive strategy for preserving ownership and control (e.g. [10] Bhide, 1992), anecdotal experience indicates that small business owners are relatively unaware of bootstrapping strategies and simply bootstrap as a survival tactic. Additionally, while some recent literature has proposed that bootstrapping forces firms to create efficiencies and become more sales driven (e.g. [45] Timmons, 1999), it has long been accepted in some circles that lack of financial resources limits small firm performance and growth (e.g. [17] Cassar, 2004; [23] Davila et al. , 2003; [20] Cooper et al. , 1994).
This study analyzed whether the financial status of small firms impacted their subsequent use of bootstrapping and whether that use of bootstrapping in turn affected their financial status. In 186 small, post-start-up manufacturing firms in the USA, support was found for the notion that bootstrapping is generally used as a reactionary measure, with highly-leveraged, underperforming, and cash-constrained firms more likely than others to bootstrap. The results also indicate that the same bootstrapping methods that small business owners are likely to use in times of financial constraint may be detrimental to subsequent firm performance.
Literature review
Bootstrapping in small firms
It has long been known that outside debt and equity financing for small firms is difficult to obtain, expensive, and often undesirable for personal reasons ([17] Cassar, 2004). The vast majority of small firms are unlikely candidates for venture capital or angel investments due to amounts of capital needed and growth potential, giving them few options for raising money. Even for firms that may be candidates for private equity, approaching...