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Bootstrapping: Cutting corners
and
pinching pennies to finance your business
By Jenny
C. McCune • Bankrate.com
 When
everybody says "no" -- from the banker to the private investor --
the tough small business owners turn to themselves. They raise money
from within by bootstrapping.
Bootstrapping is a common-sense
way to finance a business by saving rather than borrowing
money. It's being as frugal as possible so your business can be
started on as little cash as possible. It takes discipline and determination
to bootstrap. Not everybody has the guts to do it. But it can turn
a business concept into reality.
Tom S. Gail's, executive professor at the University
of Houston's Center for Entrepreneurship and Innovation, estimates
that between 75 percent and 85 percent of startups use some form
of bootstrapping to help finance themselves.
A
better way to finance
Although it's a lot harder to do than signing on the dotted
line to get a bank loan, there are advantages to bootstrapping.
Among them:
- Your business will be worth more down the
road because less money has been borrowed.
- It will also be easier to raise capital in
the future since your company won't already be overburdened with
debt.
- Bootstrapping, since you don't have to repay
a loan or investors, can also be a great way to test the entrepreneurial
waters without getting in too deep.
The biggest downside of bootstrapping is that
self-financed firms are on a low-cash diet. They tend to be capital-starved,
making it difficult to grow quickly. Of course, fast growth isn't
necessarily a goal of most business founders. Very often, taking
the frugal path is the best or only option for getting a business
off the ground.
Paths
to glory
Here are seven ways to bootstrap your business to glory:
1. Slow down supplier
payments.
Get people you owe to accept longer terms -- Net 60 or Net 90.
Be forewarned: this can be difficult to arrange when you're just
starting out. Who wants to extend terms to somebody without assets?
To clinch the deal, meet with your suppliers' financial officers
and explain your situation. That could mean actually sharing your
business plan and income projections -- whatever it takes to reassure
the supplier that your company will pay up. If longer terms aren't
possible, see if you can split up payment, say 50 percent upon receipt
of goods and the remainder owed by Net 30, Net 60 or Net 90 -- whatever
the supplier will agree to.
2. Speed up customer
payments.
Have clients pay in advance or shorten payment terms. One negotiating
gambit: Give early birds a discount to reward them for prompt payments.
(Conversely, institute penalty fees for accounts that delay.)
3. Frugal businesses
start at home.
Save money on rent by starting your business in the home. Just
be aware of local zoning ordinances and make sure that you can operate
a business in your residence. Service companies should have no problem,
but manufacturing firms may not be able to avail themselves of this
option. Note that working from the home can work even if you have
employees. Just have a virtual company in which everyone works from
their homes. (Having employees work from home can also lower your
overhead.)
4. Start out part-time.
Don't give up your day job. Become an entrepreneur by night
-- or whatever your nonwork hours tend to be. By starting part-time,
you'll still have a salary coming in, which can help finance your
startup. Of course, if your business directly competes with your
employer, you won't be able to pursue this option, particularly
if you've signed any non-compete employee contracts.
5. Share your office.
If working out of the home isn't a possibility, check around
to see what businesses in your area have excess space. One entrepreneur
with a hot sauce business used a Realtor's extra office in Belgrade,
Mont., to set up her first retail shop. She saved quite a bit in
rent because she didn't have to rent a whole storefront by herself.
6. Lease, don't buy
equipment.
While you pay more in the long run for leased equipment, startups
very often don't have the cash upfront to pay outright for office
equipment. For them, leasing is a great way to go.
7. Barter for services
and products.
Instead of paying for goods and services, your company can barter
for them. For example, a landscaper could care for his accountant's
lawn in return for bookkeeping services.
What's key to succeeding in bootstrapping is
to be penny-wise without being pound-foolish. An entrepreneur might
cut corners by trying to do legal work himself instead of hiring
an attorney, but it would take him so long to do the work himself
that it would make more sense to barter services with the lawyer.
So it takes dollars and sense to finance through bootstrapping.
Jenny C. McCune is a freelance
writer based in Montana
-- Posted: Nov. 1, 1999
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