Bootstrap Finance: Thrifty is Nifty

Expediency That Works

Bootstrapping is a craft that is becoming very widely used in the creation of companies. In tough economic times it can be a matter of survival once the business has started. To many entrepreneurs it is a natural behavior, others need an apprenticeship. Here is a page of help.

Before you start, you might want to look at the story of a bootstrapped business that looks like it is taking off: Wondermill. This software outfit produced Freedback a form creation program for small and medium sized business.

Bootstrapping is building a business with little or no capital. The entrepreneur uses imagination, ingenuity and hard work instead of seeking outside finance.

Bootstrap finance often has to do with not raising money and not spending it either, but finding creative ways to achieve your objectives—hence it is often not to do with obtaining finance at all!

Make sales the Job #1

Make cash management Job #2

Make low fixed costs Job #3

How Little Money Do You Need?

Before you start, ask, "How little money do I need?" Some say too much money is worse than too little. You can burn dollar bills very fast at the start and you are going to need every penny as sales begin to take off.

Bootstrapping benefits include:

• no equity relinquished—your ownership maintained,
• savings of interest—it can compound like crazy,
• less time committed to chasing funding,
• less debt means you'll be able to borrow more when you must,
• opportunity for higher profits when you get there.

"Going Bedouin" is another expression you may have heard in connection with the lean enterprise. Coined in 2006, it describes the coffee house based, laptop and cell phone carrying geeks of San Francisco, with no fixed corporate office. Wired magazine's Jargonwatch section describes it:

"Downsizing a business by eliminating all but the core assets: employees and the communications links between them. A company that has gone completely Bedouin lacks a physical location, operating simply as a network of engineering, sales and support staff connected 24/7 by Internet and cell phone."

An example is Hat Trick Media that helps companies think beyond their own websites and expend into the world of syndication.

If you would like more on financial bootstrapping, then see my articles

• Staffing a Startup Without Hiring
• Think Big, Start Small
• Virtual Seed Money

Practical ideas for bootstrapping

These are bootstrap finance ideas that you can use right away:

Sources Close to Home

• if you only need small sums, what about a yard sale?
• if you need slightly more, why not consider sending unwanted items of value to auction?
• down trade your car to release capital;
• look at small earning possibilities: an example is to reply to surveys for fees—like joining the Ipsos Survey Panel;
• borrow from your retirement fund;
• seek local consulting opportunities in your field of expertise, especially if they relate to the business of your startup;
• rent out a room in your home, perhaps via Craigs List;
• create a website and seek passive income as an affiliate of related businesses.

Sales & Marketing

• make sales the Job #1—over-deliver not over-sell;
• use the feedback from your sales as your market research;
• do a little marketing every day—the effect is incremental;
• sell services before your product is ready—delivery costs less and gets revenue faster;
• get editorial press coverage—there is loads of free help, e.g., Press Exposure;
• ensure economical customer acquisition—the process of: promotion→inquiries→prospects→customers;
• consider using public transport or budget hotels when you travel;
• give super customer service ensuring additional sales from existing customers—costs less than acquiring new customers;
• get all or part payment up-front from customers, get them to write you a letter of credit, or at least see if you can get stage payments;
• negotiate electronic payment of your invoices—the cash arrives quicker;
• offer a discount (say 5%) for automated payments for regularly invoiced sales or subscriptions;
• use your networks—you'll be surprised how much help there is and how many ambassadors for your business there are out there;
• pitch your business on line at no or lo-cost: an example of how to do this is vator.tv where you can upload a video pitch free. A UK version is cmypitch;
• Make use of all those Apps available for free and, oh yes, use Twitter and the social media for getting your message over.

Raise the Right Finance

All finance is not created equal. It is logical to the finance providers, but you may feel that it is unfair that if you do not have collateral, you have no track record in business and worst, if you have a poor credit history, you will be charged high rates of interest and be asked for a personal guarantee. It could seem that those who do not need the money get charged the lowest rates.

If you are looking for traditional bank loans, you are very likely to be invited to consider getting a 7(a) SBA loan guaranty. If so, take a look at the Quick Reference Guide to SBA loan guaranty programs that you can down load from here in PDF form.

There are many ways round the problem. The one most frequently used is Person-to-Person, or P2P lending. Borrowing from family and friends will frequently enable you to borrow money at more favorable rates.

Community Banks may well be an easier route to loans for startups. The point of decision making will be much closer to the lending officer that you deal with. Most of them did not get snarled up in sub-prime lending and have cleaner balance sheets than many of the large banks. They channel most of their loans to the neighborhoods where their depositors live and work. Many community banks are willing to consider character, family history and discretionary spending in making loans.

Seek soft loans or loan guarantees that government institutions offer for small business or minorities. For example, I work with Community Capital of Vermont—a non-profit that offers unsecured loans to deserving cases in the Green Mountain State.

Community Supported Business is a new way of borrowing from customers. In the US and other countries, the concept of Community Supported Agriculture is quite well developed. It involves a 'community' of customers paying a lump sum before the season and taking delivery of produce as it is harvested. This enables the grower to have money up-front for planting and cultivating and the consumer to have a regular supply of produce—locally. There is every reason to apply the thinking to other sectors. I support a village bookstore in this way; I paid $1,000 and get a book to the value of $25 a month over the following 48 months, and a 10% discount as well.

Don Debelak's book, The Risk-Free Entrepreneur—The Idea Person's Guide to Building a Business With Other People's Money is good not only for inventors, but startup artists of all kinds.

Finance is is best raised from the right partners at the right time, as you will see on the Financing page of Startup Savvy.

Manage Cash

• make cash management Job #2—how much in the bank today and next week;
• ensure your customers pay within 30 days (consider a discount for prompt settlement)—sales of $100 000 a month, for example, with an average settlement of 45 days need cash of $150K in the business, whereas 60 days need $200K;
• use what my friend, Sven Atterhed of the Foresight Group, the intrapreneurship specialists, calls 'customer financing', that is to say talking with early customers to help with your cash flow (provided of course that they love your products). I remember asking a client during the first three months of my company if he could settle his invoice two weeks early. He did and it saved us from folding the baby business.
• invoice on-time for customer payment schedules—use terms of net 15 (days);
• follow up all invoices before the payment is due (check, for instance, that the paperwork is correct and that the invoice has reached the accounts payable person, in other words you don't need to appear to be chasing payment);
• make sure your prices include a good gross margin (revenue, less cost of goods sold)—allows for some late payers;
• do your own bookkeeping—buy an excellent book: Keeping the Books; use QuickBooks (I do);
• take advantage of any public grants or incentives that may be available, but don't build your business plan on the basis of this kind of finance.

Premises and Staff

• be parsimonious: make low fixed costs Job #3
• do you really need your own place or can you share;
• delay long-term commitment to premises for as long as you can;
• use JAJAH Web-activated telephony—global VoIP telephony between normal land line and mobile phones, without software download, installation process or headsets;
• use Skype; it has become amazingly easy, swift and has video conferencing possibilities as well as the traditional video telephone, plus one of the neatest file transfer systems I have come across—it is almost instant and means business calls can become super efficient;
• do-it-yourself, e.g., print your own office stationery; you can use free or inexpensive software to help—many business forms, cards come with MS Office and other office suites, including the Open Source options; QuickBooks includes invoice and other stationery; Avery, the label people have free Avery Design Pro software for Mac and PC as well as an online version you do not have to download;
• do basic legal work yourself; many legal forms can be had for free on the Web, such as free legal forms or lectlaw and Web-based services exist for basic legal services; my main recommendation is to use LegalZoom, which is not free, but is very cost-effective. more here e.g. cliff
• build a virtual team rather than hire;
• use independent contractors (try Virtual Contractor) and virtual assistants—try Virtual Assistants or my favorite, Lori Davis;
• see where you can get low-cost or no-cost bodies such students—they could become full-timers later;
• consider people who sell on a commission-only basis, especially at the early stage of the business;

Purchasing & Investment

• request extended trade credit from suppliers (may only be possible once you prove a good payer), but don't hesitate to speak to the owner or the accounts payable department and don't forget to compare credit terms with cash discounts;
• see if you can get a conditional sales contract from equipment suppliers—you only get title to the goods when you've paid in full;
• examine leasing, rather than purchase of equipment;
• can you get equipment you want re-conditioned or second-hand;
• consider barter (also known as reciprocal trade) for materials or services—Lingualcare, an orthodontics startup purchased by 3M in 2007, bartered equity for workspace with the landlord and got cubicles from a company that went bust; there are several barter systems available on the Web—you can seek services and offer your own (e.g., barteryourservices) or you can trade in universal currency created by the International Reciprocal Trade Association;
• collaborate, for example on purchasing expensive capital items, especially those that you don't use full-time;
• find free Web-based and Open Source Business Tools—there are hundreds;
• search the Web for discounts, e.g. at Coupon Mountain—do a search for 'special offers and rebates'

Production

• see how much non-essential work you can sub-contract—you may be able to have parts produced by suppliers held on their books until you need them for your assembly;
• consider the viability of joint-ventures viable—they can involve activities with one or more partners to save duplicated costs or to share strengths;
• carry no excess inventory—while you may not be able to do just-in-time production, do not be too tempted to go for bulk discounts if it means tying up cash in work-in-progress;
• share production workspace or find others with under-utilized space, especially where they are in a complementary business;
• have no fixed workspace until you absolutely have to. Try a free wi-fi serviced café;
• if you want to find innovators to solve you science and technology problems, try Innocentive, a company that enables companies to tap into the talents of a global scientific community for innovative solutions to tough R&D problems.

A useful book which overlaps to an extent with what is listed above, but has the additional merit of being based on a handful of real-life examples. Called Bootstrapping Your Business, it is by Greg Gianforte, who built his own enterprise, RightNow in Bozeman, Montana, by bootstrapping.

You can download Seth Godin's Bootstrapper's Bible. It's free. A great resource is the blog: bootstrapme.com, "How to bootstrap your business to fame and fortune" where you will get all kinds of ideas as well as links to videos, other bootstrapping blogs, and many other resources, thoughts on entrepreneurship and tools as well as how-to guides for you to use.

You will find your own bootstraps, they are your boots, after all—I did (a bank at the time was offering royalty-based interest linked to turnover and my former company that was prepared to give me 12 months to pay for assets of the division I used to run).

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