5 Ways to Bootstrap Your Startup's Finances
Away from the Silicon Valley bubble, where seed capital seems limitless and a new unicorn spawns every month, the difficulty of getting funded in today's financial climate leads many entrepreneurs to "bootstrap" their startup. Anyone who's started a business on a shoestring budget is adept at bootstrapping, or stretching (financial) resources as far as they can.
In a literal sense it refers to self-funding your startup costs and early growth without external capital. But the principles of bootstrapping aren't limited to the startup stage. It can be one of the most effective and inexpensive ways to ensure a business' positive cash flow. In short, it means treating your resources with extreme care, borrowing less money and preventing rising interest costs.
To bootstrap, or not to bootstrap?
Recently we introduced 4 "alternative" startup financing options, but for entrepreneurs that don’t have the luxury of securing investors to help launch their business, bootstrapping is the only real alternative. Others see enough value in going it alone to reject (VC) funding. If this sounds crazy, both Valve (Steam) and Mojang (Minecraft) are examples of bootstrapped startups that have made it big.
Bootstrapping is an especially attractive option for tech startups: their innovative business models often mean low overhead costs. However, the main principle of bootstrapping - prioritising cost-efficiency - is applicable to all startups in fast-moving industries that need to stay flexible while they grow. Some startups in emerging industries opt for bootstrapping when they see a market opportunity and don't want to wait for investors to get on board.
The level of capital efficiency is crucial; any startup generating decent cash flow with the founders’ initial funding is viable for bootstrapping. Many transaction- and subscription-based mobile/Internet services startups go down this route for that very reason.
How to bootstrap your startup for future success
Bootstrapping can mean a number of different things depending on a startup's business model, industry and growth stage. Similar to the lean startup methodology, at its core bootstrapping means maximising existing resources. For most, tightly managing cash flow is a high priority.
Bootstrapped startups need to be extremely financially prudent, as their thin profits are the only funds for growth. Compared to most VC-backed companies, a self-funded startup should not spend on things that don't contribute to the bottom line, such as extravagant office space and decor.
1) Trade credit
The use of trade credit is an option for some startups intent on bootstrapping. Normally, suppliers extend trade credit to regular customers for 30, 60 or 90 days, without charging interest. However, when you first start your business, suppliers will want every order paid immediately, until you've established that you can pay your bills on time. This is standard practice. As a founder, you should try to negotiate some kind of early trade credit agreement with suppliers. Having a detailed financial plan will help in these negotiations.
Factoring can be a useful form of financing for bootstrapped startups, particularly those with large inventories or equipment costs. This involves selling your receivables - the money owed to you by other businesses - to a buyer (such as a commercial finance company) in order to raise capital. Factoring is very common in industries such as the clothing and construction industry, where long receivables are part of the business cycle.
The buyer will pay between 75 and 90 percent of face value for the receivables, and then add a discount rate of between 2 and 6 percent. The buyer assumes the risk, and task, of collecting the receivables. It's essential that you adjust your prices to account for factoring in order to still make a profit.
Check out our free, independent funding scan to learn about more how factoring could help your business.
3) Customer credit
If your business depends on a longer supply chain, customers can help you obtain financing by writing you a letter of credit. For example, imagine your startup manufactures industrial bags, and a large corporation has placed an order for a steady supply. However, your major supplier of material is located in India. In this scenario, you purchase the material for the bags using the customer's letter of credit as security.
If you spend a lot of money on equipment, you may find yourself without enough working capital to keep your business going in its first months. Leasing helps startups to avoid financing the entire purchase of high-ticket items like equipment, vehicles, furniture, computers and even employees. With leasing, you pay for only that portion you use, rather than for the entire purchase price. When you're just starting out in business, it might make sense to shop around and get the best leasing arrangement possible.
Credit contracts are also commonly used to finance equipment purchases. In this case, instead of paying cash for your equipment, the manufacturer can effectively loan you the money by selling the equipment in instalments. This enables you to use the equipment in your business while conserving working capital.
Like factoring, leasing is one of the many financing types available through The Funding Network™. Take our free, online funding scan and learn more about your options for growth.
Real estate property appreciates over time, generating equity. Many entrepreneurs borrow money for their business against this equity, often mortgaging their personal property. Lenders will often loan up to 75 or 80 percent of a property's value. This is a popular financing device for founders because the loans are easy to come by.
If your business needs to buy its facility, you could consider paying in instalments over a long-term period of 15 to 30 years. You may be able to structure the loan repayments according to your growth plan and/or seasonal peaks. For instance, you can arrange a mortgage starting with small monthly payments that increase over time, giving your business room to grow.
Bootstrapping is a mindset
Bootstrap financing really begins and ends with your attention to careful management of your financial resources. Be aware of what you spend and keep your overhead low. If you need to go the top-dollar route, make sure you can justify the expense.
Don't choose the best-looking office or location unless it's really going to pay off in increased sales. Consider secondhand furniture and negotiate for goods and services when appropriate. Take advantage of free trials, sales and promotional deals.
Keep a close watch on operating expenses. If interest rates are high, it won't take too many unpaid bills to wipe out your profits.
Most importantly, learn to maximise your growth opportunities. And remember: focus on execution.
The Funding Network™ finances 16 startups & small businesses every week through loans, VC-funding & crowdfunding - plus factoring and leasing.
Ready for growth, bootstrapped or not? Take our free funding scan.