“Bootstrap financing” comes from the 19th Century expression, “pull yourself up by your bootstraps,” which means to improve your situation by your own efforts or accomplish something without outside help.
In the world of small business and entrepreneurship, bootstrapping means launching or expanding your company using your own finances or the revenues that your business generates.
The heart of bootstrapping is being able to operate and build a client/customer base without going into debt or having to deal with the involvement of investors.
Here are some ways it’s done.
Seventy-five percent of something is better than 100% of nothing, isn’t it? By offering your early customers an attractive discount on your product or service for six months or a year (perhaps more), you can quickly create a customer base and get the routine cash flow that will allow you to handle overhead, hire help, and have the time to promote your business to new, full-paying customers.
This is when you get products or materials from a supplier without upfront payment.
Typically, a supplier will extend credit for 30, 60, or 90 days without charging interest (after you’re a regular customer). The ideal scene is to be able to sell what they give you and get paid before the supplier’s bill is due. In this way, you’ve produced cash flow without laying out anything upfront.
Example: A catering service has booked several events to cater. They obtain a large amount of food from a supplier on credit, do the events, and get paid before any interest is accrued on what they owe. With no outlay of their own, they pay the supplier and put money in their own pocket.
Trade credit is only granted to customers who have proven their ability to pay bills. However, as a new business, you may need to negotiate trade credit arrangements. The key is a properly prepared financial plan.
If your supplier is a small company, speak with the owner; if it’s a larger company, ask to speak with the chief financial officer or any other person in the company who approves credit arrangements.
Tell the person about your business and show them your business plan. Explain that getting your first orders on credit is what will get your business off the ground … and will create future business for them as well.
Letter of Credit
You can leverage your customers to obtain financing for materials you use to create your products. You do it by getting your customer to provide you with a letter of credit when they place their order.
A letter of credit is a security—it states that payment is pending until you deliver the customer’s order—and should be sufficient enough to persuade your supplier to provide you with what you need with no money out of your pocket.
Business by the Chunk
When starting any kind of business, the most important part is not the idea, but the execution. Your business idea might require more resources than you have to execute. So, look at your idea and see if you can break it down into distinct sections—chunks, if you will.
Identify the most executable chunk and do that first. Get it up and running and profitable. This gives you a stronger customer base with whom to execute the remaining chunks.
Example: a mechanic wants to open a multiple-bay auto repair shop but the finance aspect is beyond what he can currently take on. One chunk he could handle is building a good reputation, perhaps by starting a mobile repair service. In doing so, he will at least begin building up a clientele for his future shop.
Businesses that require a lot of equipment are in an unenviable position of having to lay out a lot of money in the beginning … or are they?
Often, manufacturers will finance equipment purchases. In this way, you still have a monthly loan payment, but it’s a heck of a lot less than what you’d have to lay out to purchase the equipment outright.
Equipment purchases are usually financed one of two ways: (1) conditional sales contract, in which the purchaser only receives title to the equipment once it’s paid off or (2) chattel-mortgage contract, in which the equipment is the property of the purchaser when delivered but the seller retains a claim against it until it’s fully paid off.
Similar in effect to equipment financing, leasing results in a much smaller outlay of cash than you would do with purchasing office machines, vehicles, etc. or even properties, such as office space or production facilities.
Though leasing means monthly payments, you can work out modifications to improve your cash position and reduce your outlay, such as:
- Small or zero down payment
- Maintenance costs included in lease agreement
- Payments structured to correspond to seasonal variations in your business or industry
The benefits of leasing are smaller monthly outlay and not being committed to the equipment past the lease period.
In the early stages, though it might mean that you don’t keep much money yourself, bootstrapping can save you money and make your business more valuable:
- Having borrowed less (or no money), you have fewer (or no) liabilities, which gives your company more value.
- You save a lot of money by not having to pay high interest rates.
- Later on, if you want to borrow money to expand, your no-debt condition will make your company more attractive to potential investors.
Bootstrapping will reveal to you how resourceful you can be and will ultimately make you a more confident and savvy businessperson.