There are a number of advantages to using the various methods of bootstrap financing:
- No equity positions have to be relinquished. So if bootstrapping increases the value of your business, you continue to own that increased value.
- There’s no borrowing so no interest payments are depleting working capital.
- You’re building track record of minding your finances well. This will stand in good stead when you go looking for external sources of funding.
- It also gets you into the mindset of being frugal and thinking smart – vital for any entrepreneur.
Bootstrapping can take many forms, but can be divided into personal or business sources of cash and/or reduction in expenses. Here are some obvious examples but there are a myriad of other creative ways to either raise cash or reduce expenses.
- Keep the day job – source of cash
- Spouse works – source of cash
- Pay minimal salary to yourself – reduces expenses
- Use own car/downgrade car – source of cash and reduces expenses
- Use family home as place of business and as source of equity release – source of cash and reduces expenses
- Use savings – source of cash
- Use other sources of debt such as loans and credit cards (use wisely) – source of cash
- Use of grants – source of cash
- Part time consultancy – source of cash
- Negotiate debtor terms – reduces expenses
Sources of Business Bootstrapping
Bootstrap financing really begins and ends with your attention to good financial management so your company can generate the funds it needs. Invaluable sources of business money are trade credit, property leasing, equipment leasing. Here’s some examples:
When you’re first starting your business, suppliers are going to be reluctant to give you trade credit. They’re going to want to make every order cash cod until you’ve established that you can pay your bills on time. While this is a fairly normal practice, you’re going to want to persuade them to give you attractive credit terms.
One of the things that will help you in these negotiations is showing your suppliers a properly prepared financial plan and references from your bankers or previous employers or suppliers. Tell the owner or financial officer in your supplier about your business, and explain that you need to get your first orders on credit in order to launch your venture. What works to your advantage is that the supplier will want to be convinced because you are potential business.
Another alternative is factoring. This is a financing method where you actually sell your accounts receivable to a buyer such as a commercial finance company to raise capital. A “factor” buys accounts receivable, usually at a discount rate. The factor then becomes the creditor and assumes the task of collecting the receivables as well as doing the paperwork. In addition to reducing internal costs, factoring also frees up money that would otherwise be tied to receivables.
Customers are another source of bootstrap financing by having them write you a letter of credit. It’s like paying up front and helps finance your business.
Simply lease your premises. This reduces startup costs because it costs less to lease a facility
Instead of paying out cash for equipment, purchase it with a loan from manufacturersand pay for the equipment over a period of time. In this way, equipment suppliers are a source of bootstrap financing. This reduces the sum of money that you need upfront. There are also lenders who finance 60 to 80 percent of the equipment value. The balance represents the borrower’s down payment on a new purchase. The loan is repaid in monthly installments, usually over one to five years, or the usable life of that piece of equipment.
Another option to consider is to lease instead of purchasing. Generally, if you are able to shop around and get the best kind of leasing arrangement when you’re starting up a new business, it’s much better. For start ups that are pre revenue small ticket leases are feasible on the personal credit of the founders or owners.