Ways to bootstrap

[phanio]

Given our current economy in regards to businesses – especially the lack of access to capital sources – most businesses – small or large – old or new are turning, once again, to bootstrapping.

I bootstrapped my business and many of the companies I work with have bootstrapped their business to the point that they become creditworthy in the eyes of lenders.

To that note, I have been trying to compile some information regarding different methods of bootstrapping and was wonder how business owners, such as on this forum, have either bootstrapped in the past or are currently bootstrapping.

For those that don’t know – bootstrapping is usually any method of financing other than traditional measures like bank business loans or equity capital. Bootstrapping typically requires business owner to look inside – either inside their own business, their personal lives or their own sphere of influence.

Example – some very common methods of bootstrapping are:

-Using personal assets to secure loans or be sold off for capital.
-Using personal credit – like credit cards or personal loans.
-Tapping family and friends for investments or loans.
-Continuing to work for someone else while starting or running their business on the side.

Some uncommon ways may include:

-Loans against retirement accounts – i.e. 401(k) or IRAs or even converting those accounts into trusts and ordering the trust to invest in the business.
-Chasing business and deals before having the funds to complete the project – then using the deals in hand to secure financing. I call this putting the cart before the horse.
-Using customer financing – where you require the customer to pay an amount up front – and amount to cover your variable costs prior to you starting a job, completing a project or manufacturing your product or service.

What others ways have business owners on this forum used to bootstrap their businesses? Never know you might either see a method that could work for you as you move forward or offer your unique way to someone else who needs a bit of help.

[vangogh]

I'm one of those who bootstrapped my business and I'll be happy to share.

When I first started this business I kind of had a part time job. I was doing some work for a web host I know. In some ways he was like a client, but the pay was more like I was working for him. I helped him set up a new site for his business and he also had me work on some of his client's sites. It certainly didn't keep me in business, but it did help provide for something coming in.

I'm also fortunate in the sense that I don't need a lot. I've often lived a Bohemian lifestyle and that's never required much money. I don't spend a lot of money even on the basics and so didn't need a lot of money coming in.

I also used credit cards wherever possible for awhile. They're like getting a high interest loan except you don't have to do all that much to get the loan. As long as you pay the minimum and stay below your limit, you have a supply of money when needed. Early on if I could pay for something with a credit card I did. Then once I'd managed to build up a client list and was taking in more than I needed I first stopped using the cards and then started paying them off.

I suppose I also took on some work that I wouldn't take on today. Projects I knew would be more trouble than they were worth, the occasional odd job that had nothing to do with my business. I also took on a few non-paying jobs to help build a portfolio. Of course it wasn't until I stopped taking these kinds of jobs that my business started doing well.

One last thing. While I didn't have much in the way of money when I was starting, I did have a lot of time. I routinely put in 60-70 hour weeks, mostly trying to market myself and learning how to do my job better. A big part of success is sticking with something even when the money isn't there.

[Spider]

I started my plumbing business with my own money. Not by choice, mind, because I took the traditional route of applying to a bank for financing, which was refused. Looking back on it now, I think it was silly to have expected a bank to finance a business start-up - that's not what banks are in business for! I'm pleased now that the bank did refuse - we were able to grow unfettered by loan repayment needs.

I decided to start big - because I would be operating in major construction projects and needed to be seen as substantial enough to do that work. Our first job was the construction of a new hotel to which I was introduced by a friend. That enabled me to hire our first two plumbers. The second job enabled my partner to leave his job and come on board.... and so we grew rapidly and efficiently, into a multi-million dollar business.


In complete contrast, my wife's pet grooming business was started with $2,000. An existing grooming shop had died and gone out of business. I cannot remember how we met the owner, but the business had been closed for two or three months and the landlord of the retail space was about to commandeer what little equipment there was for unpaid rent. My wife had not long before begun learning to groom dogs and, although we planned to open our own shop, she certainly wasn't ready yet. But it was too good an opportunity to pass up.

The asking price for the business had been $20,000, but now it was defunct, without a sellable lease, and comprised of some old dog runs and minimal, well-used equipment. And, of course, the old customer list.

I approached the landlord, arranged to open the shop at the old rent, offered the seller $2,000 for the mailing list and whatever equipment she didn't want to remove, and was soon in business as "Puppy Love Pet Grooming and Boarding." The business has provided our basic needs for the past 15 years.


There are many ways to start a business with minimal cash, but it is important to start with your own money and not borrowed money.

[vangogh]

it is important to start with your own money and not borrowed money.

I have to disagree. It really depends on the situation. There's nothing wrong with borrowing money to start a business. I think it's preferable not to be in debt, but if taking on debt helps you get where you want to go then it's perfectly acceptable.

If you can make more using the money than the interest you have to pay for borrowing the money doesn't it make sense to borrow the money.

I'm not suggesting everyone should run out and throw themselves into debt in order to start a business, but I don't think people should be afraid to take on debt either. If borrowing some money is what it takes to start a business that can support you for the next 10, 20, 50 years then it makes sense to borrow the money.

[Spider]

This is why I said what I said, VG. I have no fear of debt and have used debt. However, starting a business in debt and a going business taking on debt are two very different things.

Starting a business when there is no immediate income and the first thing one must do as a new business owner is to write a repayment check to the bank, is pure folly. At least go out and make a few sales. At least go out and win a few customers or clients. At least get established as a business before taking on the burden of repayments.

If one was already a business owner before and is now about to start another business, one must have some money built up from the previous business, or one was not a capable business owner. And if that is the case, that is a problem that needs to be addressed before getting into debt.

If one has never been a business owner before, one has no experience of business debt. Add that inexperience to the inexperience of being a business owner, and you are asking for trouble. Learn the business first, then take on debt if necessary. Taking on business debt before knowing what it is to be a business owner, is an indication of poor business decision-making.

[vangogh]

I have a hunch we're not really disagreeing all that much. I do agree if you can finance a new business without taking out debt, especially if you have no business experience, it's the preferred option. However it really comes down to the specifics of the individual and the business.

I'll use myself as an example. When I started my business I didn't have money. Fortunately my business doesn't require much in the way of start up costs and I basically had what I needed, which was mainly a computer. I had little to no business experience and while it was easy enough to say I was in business I knew it was going to take some time to figure out how to get clients and make money. I also knew that it was going to be hard to pay for some basic necessities of life until I built the business past a certain level. At the time I didn't know how to do that. My biggest asset as a business owner at the time might have been confidence in myself to learn what I needed to know and then apply it.

If I'm understanding right you would have advised me not to take on debt. Technically I had one failed business before, but I really had next to no business experience. At the time I had probably read a handful of books, but no real experience. The earlier failed business was short lived.

What I did was use my credit card as much as I possibly could. I charged everything from bills to groceries. I think the only thing I couldn't pay with a credit card was my rent, but otherwise everything went on the card. Fortunately I was able to make enough to pay rent each month, but even that was in question much of the time. I managed to scrape by as best I could and in time I did build my business to where it could support me without having to use the cards. A little while later I was able to make enough to start paying down the cards.

I won't suggest that everyone should follow what I did. I mentioned it above that I know how to live very inexpensively. I don't need much and I suspect that most people would have had a hard time living on the money I had that first year. I also didn't have a family to support.

My point though, is that despite the situation and it probably not being the smartest thing for me to take on debt, I did and it turned out to be the right thing to do for me. I would think there are other people in similar situations to mine and I would think there are people in different situations who could take on debt to build their business even if it may be a huge risk.

[Spider]

...What others ways have business owners on this forum used to bootstrap their businesses? Never know you might either see a method that could work for you as you move forward or offer your unique way to someone else who needs a bit of help.

Considering retail space -- the expense of setting up shop can be high, especially if moving into newly-constructed premises. The initial build-out of walls, flooring, dropped ceilings, lighting, cupboards, display shelving and cabinets, counters, decorating, etc. can really mount up. Even moving into previously occupied space will require shelves, cabinets, counters, desk(s) and work surfaces. You will probably need to redecorate, too.

Here's what I have done on several occasions that helped get a retail business established without these enormous expenses — Recalculate the rental terms.

1. Our landlords asked for $X per month with X% annual increases plus $Y per month area maintenance to be increased as necessary. Min. 3-year lease.

2. I would work that out to determine the total amount the landlord would receive over a 5-year period.

3. Add an estimate of the buildout to the total rent and maintenance.

4. Offer a rental plan where the landlord does the buildout and tenant pays a fixed rent payment of 2 years at $x/month, 2 years at $y/month and 1 year at $z/month, where the total paid comes to more than the total calcuated in #3 above.

Advantages :
- Landlord receives more overall than he is asking for - incentive to do the buildout.
- Landlord has a longer lease - incentive to accept offer.
- Tenant has rents that suit his operations - usually this is low rent at the beginning rising to high rent at the end.
- Tenant has no upfront expenses.

Landlord may also be willing to buy furniture and other equipment and have the cost (and a little profit) added to the rent, thus reducing even further the start-up costs for the tenant.

I have never had such an offer refused.

[phanio]

All great information - really determined by the person, the business and the risk tolerance.

Frederick – love the example for retail space. I have found that people who are really good at selling can find ways to sell a deal to a landlord, supplier, creditor, etc – something that seems win/win to everyone but really benefits the businesses. I have always said – get creative, find a way to make it work for you – then sell the hell out of it.

Vangogh – you are right – many people start with credit cards and it does take money to make money. A very powerful concept in business is to use other peoples money (it really can lower you own risk) as long as you (as you stated) manage it properly – i.e. use the funds for purchases that will generate more revenue then the funds costs (having an assets pay for itself) as well as for the right purpose (don’t use short-term financing for long-term needs and vice versa), don’t abuse the credit (going over limits – not making more then minimum payments, etc – which will not only take forever to get out of debt but most creditors will kill you with fees for mismanagement) and having a plan to get out of debt as soon as possible (as soon as you no longer need the debt for the purpose you took it for in the first place).

Thanks for your responses.

I just think that with our current economy – (even while access to funding for start-ups and small business is hard no matter what economy) more business owners will be forced to find creative ways to bootstrap and I think we can help these entrepreneurs through personal experiences – experiences that may help them 1) reduce some anxiety as well as 2) allow them to make calculated risk decisions.

[greenoak]

i am scared of debt but have some...i see lots of stores try it without enough inventory to even have a chance..so i see where you probably have to have it to get started.....
the way we bootstrap is to add value in every way we can....we turn a $20 item into a 100$$ item very often.... using our workers and skills....
we were in a good position when we started and had a fast and furiously selling product that let us have a wonderful turnover and make money on a pretty small investment.....
..i guess the way we bootstrapped was ;....we sold cheap and built a great following who bought and bought and had super deep pockets and needs..........as we got bigger and not quite so cheap, we added new buyers and lost some of the faithful who were so important at the start...
our turnover must have been 10 or 15 times a year back then!!! that rate would be incredible and impossible now when our inventory is 6 figures not 4.......id sure try it if the buyers were there tho...
ann

[Spider]

Just a couple of points that need to be said---

...I have found that people who are really good at selling can find ways to sell a deal to a landlord, supplier, creditor, etc – something that seems win/win to everyone but really benefits the businesses. I have always said – get creative, find a way to make it work for you – then sell the hell out of it...

The secret to negotiating is not to find a way to make it work for you – then sell the hell out of it. It is to find a way to make it work for the other person and which benefits you, too. By putting the other person first, you don't have to "sell the hell out of it." There's no selling to do if the deal is good for you both.

...A very powerful concept in business is to use other peoples money (it really can lower you own risk) ...

No it does not! This is totally the wrong approach that will backfire on you in the long run. If you are using OPM - other peoples' money - the risk is magnified. If you win, you win big because of the leverage. If you lose, you now have to pay back a larger sum than you had in the first place. There is risk money available - at extremely high pay back rates - but ordinarily, loans are not risk and you will be required to give a personal guarantee to repay what you borow, whether you succeed in your business or not.

...don’t use short-term financing for long-term needs and vice versa...

There is nothing wrong with using short-term financing for long-term needs. In fact, there can be an advantage in pushing oneself to pay back the loans prematurely. A series of reducing short-term borrowings to finance long-term needs is common practice, especially in a falling interest rate environment. What is risky is long-term financing for short-term needs. That should be avoided.

...having a plan to get out of debt as soon as possible ...

I find this short-term thinking. Why use profits to pay down debt when those profits can be used to create more profit than the cost of the debt? viz. If you can make 20% net profit from putting cash to work, why use it to pay down a 8% interest debt? Doesn't make sense!