Bootstrap Finance

Expediency That Works for Lean Startups

“The beautiful thing about being a bootstrapped business is that we aren’t trying to please anyone other than ourselves. We have structured our company so that we can provide excellent service–and still have flexibility”, says Alicia Allen founder of Historical Emporium.

Bootstrap finance 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.

Bootstrapping is building a business with little or no capital. The entrepreneur uses imagination, ingenuity and hard work instead of seeking outside finance. Bootstrapped ventures earn money–funded ventures spend money!

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, so even if you have big ideas you can still profitably use bootstrap finance. You can burn dollar bills very fast at the start and you are going to need every penny as sales begin to take off.

The benefits of bootstrap finance 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.

Practical Bootstrap Finance

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 or create a rental apartment in your basement;
• Sell stuuf that you are not using, perhaps on Craig’s 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.

Vator (short for innovator) is a professional network for entrepreneurs, where you can pitch your business on line at no or lo-cost–and is by consequence a good place to start boottsrap finance. Founded and run by journalist Bambi Francisco, Vator consists of Vator.tv as well as VatorNews, Vator’s news site focused on the business and trends of high-tech entrepreneurship and innovation.

Make a video–for free. Go to xtranormal, where you can make one, with no expertise except the ability to type. My grad students have been using it to make videos decribing what they learned on their MBA.

Make use of all those Apps available for free and, oh yes, use Twitter and the social media for getting your message over.

Manage Cash

A key to bootstrap finance is to 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: Basic Recordkeeping and Accounting for the Successful Small Business; or 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;
• watch your ‘receivables’ like a hawk; cash flow is critical at any time, but when you start a business, nothing is more important and late payments can cripple you.

During the 11 years I had my main business, our collection period never went out beyond 38 days.

Raise the Right Finance at the Right Time

All finance is not created equal, including in the realm of bootstrap finance. 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 download from here in PDF form. Another handy tool is offered by BoeFly that streamlines loan origination through technology, by utilizing member banks’ criteria to match compatible parties, by making the process more efficient using BoeFly’s tools and services, and by expanding access to borrowers/lenders both within and outside of ones geographical area.

There are many ways round the problem of raising loan finance. 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 and itself is a form of bootstrap fiunance. 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.

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 Owl.

Person-to-Person (P2P) Finance

The internet has enabled what has come to be known as P2P, or Person-to-Person communication and it applies to finance both for personal and (small) business finance.

Chances are high that you will finance the business from your own personal resources and borrowing from friends and family. If so you are making use of bootstrap finance without even calling it that. Not only as a result of the credit squeeze, there is a growing trend towards business borrowing and capital financing from people you know.

There are a number of P2P loan organizing web-based companies, such as Lending Club and Prosper. Not many, since regulatory authorities watch them very closely.

The wider aspect of what is called Social Finance and Affinity Capital takes you into the realm of thinking about finance and capital in a sustainable way, whereby you give expression to your personal ethos in financial transactions.

The most exciting development in P2P finance is Crowdfunding. It’s the social networking Facebook generation way of raising finance for all kinds of projects in business, non-profits, and the arts. Crowdsourcing will become a way of marshaling dollars to back enthusiasm for innovations.

Promissory Notes: get the paperwork right

While relationship may be enough to get the support, the actual transaction must be done correctly, or you will not only endanger the business, but worse, you will endanger those relationships. If you do borrow, then the procedure is quite straightforward. You will need to draw up a promissory note to set it down in a legally binding way for both parties.

The things to be included in a promissory note include:

• the parties to the loan, the amount and the rate of interest;
• terms of repayment—periodic: regular amounts over the term including capital and interest; balloon: regular amounts of smaller size with a big terminal payment; lump sum: all capital and interest at term;
• any fees for late payments and the way they are to be treated;
• where and how payments are to be made;
• penalties (or not) for early settlement;
• what happens in the case of default on the loan;
• joint and several liability;
• modification procedure (if agreed or not);
• transferability of the loan;
• the jurisdiction under which the loan is written;
• and, of course, witnessed and dated signatures of all the parties.

A very good source of free promissory notes for you to consider can be found at docstoc. Using docstoc is a form of bootstrap finance , given how much less expensive a route to legal documents it is by comparison with attorneys. Choose or modify a promissory note that meets your needs and if you have the slightest hesitance about signing, pass it by your attorney. You can get  Promissory Notes from Nolo.

Virtual Seed Money: Use the Bootstrapper’s Cashbox is my article on getting small loans and startup capital in ways outside the normal banking and angel funding routes. It will also give you links to sources of much more help.

LendingKarma, a San Francisco based company that is focused on providing services that help facilitate person-to-person lending. You can use them to protect your relationship, while you protect lenders and yourself. LoanBack is another company that has created a very simple process for formalizing and servicing personal loans whether you are the lender or the borrower. Even simpler is One2One Lending. WikiLoan is also a website that provides tools for peer-to-peer borrowing and lending. At the end of the alphabet comes ZimpleMoney, a social finance community that connects people with common financial interests, and provides online tools for managing financial relationships in a socially networked environment.

Going Bedouin, Virtual Offices, Virtual Assistants… virtual almost anything

Going Bedouin is an expression you may have heard in connection with the lean startup. Coined in 2006, it describes the coffee house based, laptop and cell phone carrying geeks of San Francisco, with no fixed corporate office. Bootstrap finance it is, since the cost of overheads is minimized. 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.”

Coworking is a style of work which involves a shared working environment, sometimes an office, yet independent activity. Unlike in a typical office environment, those coworking are usually not employed by the same organization. They may decide on collective ownership of things that they don’t need top own individually–like expensive office equipment that is used sporadically. The coworking movement strives to combine the relaxed working environment of the home office with a dynamic social atmosphere.

A Virtual Office is a combination of off-site live communication and address services that allow users to reduce traditional office costs while maintaining business professionalism. Frequently the term is confused with “office business centers” or “executive suites” which demand a conventional lease whereas a true virtual office does not require that expense. Working out of a coffee shop has become the habit of many and not just the Millenials (adolescents-mid thirties).

A Virtual Assistant is an entrepreneur who provides professional administrative, technical, or creative (social) assistance to clients from a home office. Because virtual assistants are independent contractors rather than employees, clients are not responsible for any employee-related taxes, insurance or benefits. Clients also avoid the logistical problem of providing extra office space, equipment or supplies.

Articles on Bootstrap Finance

If you would like more on financial bootstrapping, then see my page on Crowdfunding or read my articles:

Staffing a Startup Without Hiring

Guide to Clearing Your Head Before Starting Your Business: How to set a effective framework for doing business before day one

Think Big Start Small – SPQR – 10 Ways to Small Profits – Quick Returns

Virtual Seed Money: Use the Bootstrapper’s Cashbox