Best Practices for Your Early Stage Venture by Emad Rahim

BOOTSTRAPPING

Best Practices for

Bootstrapping Your EARLY STAGE

VENTURE Emad Rahim

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ntrepreneurial 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. Instead of searching for venture capitalists 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 means financing a new company without resorting to loans—that is, seeking the assistance of, or input from, other parties. These 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.

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TOP 10 BOOTSTRAPPING TIPS

1. 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, your startup 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, and you can avoid borrowing to finance the merchandise.

2. Engage in factoring Factoring means you sell your receivables—money you expect from customers—to a factoring company in exchange for immediate cash. The factoring company usually charges a factoring fee, or discount, which may range from five to fifteen per cent, depending on your industry, the economy and the customer’s credit rating, among other criteria.

3. 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 they have the 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 don’t face credit risk if the client doesn’t pay.

4. Apply for a manufacturer loan Entrepreneur Magazine recommends that new entrepreneurs 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.

BOOTSTRAPPING

5. Sign a lease agreement

6. Seek cash from family and friends

9. Reduce operating expenses

Negotiate the best terms you can get in a lease agreement, and shy away from purchasing office space. You don’t have the cash, so you might as well find the best lease deal out there that fits nicely with your startup, industry and the main location where your target audience does business.

Don’t underestimate the funding power of your inner circle when looking for alternative ways to kick off your startup. Depending on your lineage, professional network and friend list, you can raise enough operating money. Family and friends are typically more prone to funding an entrepreneur’s idea because they want them to succeed says Jason Abaluck, Assistant Professor of Economics at Yale School of Management.

Bootstrapping doesn’t simply focus on getting money from non-lending sources, it also entails an effective use of resources you already have.

Start by reducing operating expenses like rent, office supplies, utilities and materials. Also pay attention to personnel costs, and hire as many interns as you can.

7. Tap into your savings

Keeping with the same tactic of reducing operating costs, try to be a jack-of-all-trades.

Wear as many hats as possible in your new business. For example, you can be the chief executive officer, the head of operations and the purchasing manager.

Don’t underestimate the funding power of your inner circle when looking for alternative ways to kick off your startup.

Want others to show you some financial love by helping to propel your business? Of course, the answer is “yes.” So why don’t you start by using part of your own nest egg? Certain retirement schemes will allow you to borrow money from your own accounts at reduced rates.

8. Sell equity stakes to investors Inviting other investors to buy shares in your startup is another effective bootstrapping strategy. You simply sell equity stakes, or shares, of your company to these investors in exchange for cash. You lose some ownership in your company, but you avoid the often stratospheric interest rates charged by banks that could drag your revenue margins down.

10. Be a jack-of-all-trades

Takeaways Bootstrapping is an art and a science, and you should treat it as such. It is an art that you, as a startup owner, need to polish, making sure you cultivate the appropriate ties with key stakeholders that will help your business grow.

Bootstrapping is also a science in the sense that you still need to manage your business by the numbers, ensuring that your operation generates sufficient revenue to cover your financing costs and eke out a reasonable return on investment.

Money issues can be the bane of your business – whether you have too little to successfully operate or grow it, or too much from the wrong people or institution. Research your options carefully and tread strategically toward the best combination of options for you and your business.

Biography Ø Emad Rahim is an award – winning entrepreneur, educator, author and community leader.

He currently serves as the Assistant Dean of Business at Strayer University and Professor at the Jack Welch Management Institute. He is the appointed Endowed Entrepreneur-in-Residence for Oklahoma State University and Visiting Scholar at Rutgers University. You can follow him on Twitter @DrEmadRahim.

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