Entrepreneurial financing might be one of the most difficult and intimidating aspects of business ownership. While entrepreneurs are filled with innovative ideas and passion, they’re often starving for the capital to jumpstart and grow their business. But instead of searching for venture capitalist and angels to invest in your business or hoping you get invited onto the show Shark Tank to pitch your idea, why not consider bootstrapping first?
Instead of searching for venture capitalist and angels to invest in your business or hoping you get invited onto the show Shark Tank to pitch your idea, why not consider bootstrapping first?
Bootstrapping simply means financing a new company without resorting to loans—that is, seeking the assistance of or input from other parties. This can include friends, family and colleagues, but also key stakeholders, such as suppliers, customers, the public and unions. The goal here is to shun the conventional lending system that banks and insurance companies, among others, operate.
According to Professor Ramana Nanda —a small-business finance expert and bootstrapping connoisseur at Harvard Business School—bootstrapping also comes into play when startup owners feel that borrowing costs are too high, given future growth prospects, a sluggish economy and uncertain operating contexts.
So, here’s a look at the top 10 bootstrapping tips for early stage ventures:
Seek trade credit.
Trade credit is the kind of quasi-borrowing you get from suppliers and service providers, such as shipping companies, utilities firms and logistics businesses. For example, you can sign an agreement with a supplier, whereby you get merchandise and pay, say, after 90 or 180 days. The agreement gives you time to collect cash from customers before paying the supplier, andavoid borrowing to finance the merchandise.
Engage in factoring.
Factoring means you sell your receivables—money you expect from customers—to a factoring company in exchange for immediate cash. The factor usually charges a factoring fee, or discount, which may range from 5% to 15%, depending on your industry, the economy and the customer’s credit rank, among other criteria.
Get a letter of credit from customers.
A letter of credit is a note that your customer’s bank sends to your financial institution, confirming that the client indeed has enough funds available to pay you. This letter gives you—and your banker, for that matter—peace of mind, because you don’t have to borrow money to purchase the materials before selling them, and you also don’t face credit risk if the client doesn’t pay.
Apply for a manufacturer loan.
According to BusinessFinance.com, “a manufacturing loan is a special purpose loan that provides the funds for all aspects of manufacturing or a manufacturer.” This type of loan allows you to negotiate loans or financing agreements directly with manufacturers, especially when it comes to purchasing fixed assets, such as office equipment and factory machinery. Manufacturers usually provide these loans at better rates to lure prospects, and this is an effective way to propel your bootstrapping efforts.
Sign a lease agreement.
Negotiate the best terms you can get in a lease agreement, and shy away from purchasing office space. You don’t have the cash anyway—so you might as well find the best lease deal out there that fits nicely with your startup, your industry and the location where your target audience does business.