Bootstrap financing is probably one of the best and most inexpensive routes an entrepreneur can explore when raising capital. Bootstrap financing is a way to pull yourself up without the help of others. You are the one financing your growth by your current earnings and assets.
There are a number of advantages to using the various methods of bootstrap financing:
– Your business will be worth more because less money has been borrowed, and therefore, no equity positions had to be relinquished.
– You won’t have to pay the high interest on borrowed money.
You can be creative in finding ways to raise profits, without having to look to external sources. It will give you the added confidence of business savvy.
Normally, a supplier will extend you credit after you’re a regular customer for 30, 60 or 90 days, without charging interest. For example, suppose that a supplier delivers something to you, and that invoice is due in 30 days but you have trade credit or terms. Your terms might be net 60 days from the receipt of goods, in which case you would have 30 extra days to pay for the items.
However, when you’re first starting your business, suppliers aren’t going to give you trade credit. They’re going to want to make every order C.O.D (cash on delivery) or paid by credit card in advance until you’ve established that you can pay your invoices on time. While this is a fairly normal practice, to raise money during the startup period you’re going to have to try and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly prepared financial plan.
When you visit your supplier to set up your order during your startup period, ask to speak directly to the owner of the business if it’s a small company. If it’s a larger business, ask to speak to the chief financial officer or any other person who approves credit. Introduce yourself. Show the officer the financial plan that you have prepared. Tell the owner or financial officer about your business, and explain that you need to get your first orders on credit in order to launch your venture.
The owner or financial officer may give you half the order on credit, with the balance due upon delivery. Of course, the trick here is to get your goods delivered to you, and sell them before you have to pay for them yourself. You could borrow the money to pay for your stock, but you would have to pay interest on that money. So trade credit is one of the most important ways to reduce the amount of working capital you need. This is especially true in retail operations.
One way to use your customers to obtain financing is by having them pay deposit for goods or services they buy from you. For example, suppose you’re starting a business manufacturing industrial bags. A large corporation has placed an order with your firm for a steady flow of cloth bags. The major supplier from which you will obtain the material the bags is located in India. In this scenario, you obtain a deposit from your customer when the order is placed, and the material for the bags is purchased using the deposit. You don’t have to put up a cent to buy the material. You will have to negotiate with your supplier to deliver the entire order and you will settle the balance within 30 days.
In your personal financial dealings, you may have had a builder, or someone else working for you, ask for money up-front in order to buy the materials for your job. That contractor used your money to get started on the job. You were actually helping to finance that business. This is how customers can act as a form of financing.
Leasing with Equipment Suppliers
Instead of paying out cash for your equipment, you can lease your equipment from the equipment suppliers. If you want to start an internet and printing business, instead of having to purchase all the equipment, rather negotiate with the supplier of the equipment to lease the equipment and then pay on a monthly basis until the business is in a position to purchase its own machines. I must caution though, it is always advisable not to own equipment that gets outdated quickly. Technology equipment is better rented than purchased especially when you are starting your business.
Leasing has been around for a long time. It’s common for businesses to lease property for retail facility, office space, production plant, farmland, printing equipment etc. There are advantages for both the lessee and lessor. The lessor enjoys tax benefits and may gain from capital appreciation on the property, as well as making a profit from the lease. The lessee benefits by making smaller payments, retains the ability to walk away from the equipment at the end of the lease term, and may be able to negotiate build-in maintenance provided by the lessor.
Starting a business from scratch without funding is a daunting task or a near impossible task. Depending on your negotiation skills with the various suppliers and customers, you can be able to start your business without funding. It must be noted that not all businesses can be started through bootstrapping. Easier said than done, but it has been done before.