Funding is often one of the first things owners worry about when starting or growing a business. It takes money to make money, as the old saying goes, and many of us don’t have the funds our business may need. For many, finding funds – from a bank, an investor – not only seems necessary, it’s seen as validation; someone has assessed your business and deemed it worthy of financial support.
There is an alternative: bootstrapping. Bootstrapping allows a business to launch or grow by relying on internal resources, such as sales or personal savings, or external, non-monetary support, such as resource sharing or barter. All too often, though, bootstrapping is seen as second-best, a refuge for those companies not quite good enough to attract outside capital. This could not be further from the truth.
Many successful companies have grown and thrived without any outside funding. Importantly, it’s not an either/or decision. A good bootstrapping strategy puts you in the driver’s seat: you get to decide when and if you’ll seek outside funding, assess what type of support is right for you and evaluate whether the terms on offer make sense. Should you seek outside funding, bootstrapping can make you more attractive to banks or investors and will allow you to use that money more effectively.
Bootstrapping can seem complicated, but there are a few basic strategies to consider. Not all of them work for every business, but one or more is almost certainly right for you.
Look for funds within your business
If your business is operational, you can often find the funding you need for a special purchase or project simply by reallocating funds: trim your marketing budget slightly in early months to save for a big promotional push later in the year, cut back on operating costs to purchase equipment you need. In fact, all businesses should consider allocating a bit of their operating profits to a savings account; that way, when a project comes along, you can act as your own bank and fund it from savings. Even younger businesses can find internal funding by incentivizing early payments.
Collect cash before you spend it
Upfront payments give you the cash you need to run your business before you need to spend it. Many service businesses can charge a retainer or ask for down payment. Product businesses can offer presales or request a deposit. Onboarding fees, paid trials and other strategies can similarly generate upfront cash. And all businesses can consider gift cards, memberships or other structures that encourage customers to pay for a product or service beforehand.
In addition to shifting cash income earlier, businesses can also seek to delay making payments. Negotiating with vendors or selling on consignment may allow you to collect the cash you need before it’s due to someone else.
Rent or Borrow Wherever Possible
Your business needs many things to be successful: equipment, personnel, marketing, facilities. That doesn’t mean you have to own all those things; you just need to be able to access them as necessary. As a start-up or small business owner, avoid spending money on these items until the business can afford them. Instead, consider borrowing or otherwise paying for equipment, staff or capabilities only when you need them. This may entail a higher “per use” cost, but the total cash outlay will be far lower and you’ll only be spending money when you have a (revenue-generating!) business reason to do so. You can even “borrow” things like personnel (by paying per assignment, hiring salespeople on commission, or partnering with a larger company) or marketing (by subcontracting or “white labeling” your product to be sold by someone else). Pay-per-use options also allow you to wait and better assess the business case for investing in these things when and if they’re needed.
Spend from Money You Have
As in the above examples, it’s best to match spending to actual income. In many cases, it may be worth paying more per transaction. For example, paying a generous finder’s fee or revenue share to someone who brings you a sale may be far better for cash flow than being on the hook for the salary of even a low-priced salesperson. Similarly, offering a larger discount to incentivize repeat business or referrals is often more beneficial than a more generalized coupon or discount offer.
Who Benefits from Your Growth?
When evaluating bootstrapping opportunities, it can be helpful to think about who might gain from your growth. For instance, if you are a baker, then someone arranging events such as birthday parties and weddings can benefit by collaborating with you. They might agree to sharing their office space at an affordable price or promoting your products in exchange for a commission. Similarly, someone who’s already selling a complementary product or service to your target customer (or a new segment you’d like to enter) might be willing to sell yours as well. Why? Because your growth might help accelerate their business too. Strategic partnerships can not only help you make your funding go farther, they can supercharge your company’s growth.
Consider Alternate Ways to Fund
Sometimes bootstrapping is not enough. If you’ve tried these strategies and still need money, here too, you can look beyond banks or investors. You may find a backer who’d prefer a revenue or profit share – which will more closely align your funding costs with your business’s profitability. Crowdfunding may also work for many businesses and could provide a marketing or product-development opportunity in addition to funding.
Bootstrapping is Right for You
To summarize, all businesses can benefit from bootstrapping. Beyond the funding benefits, it limits the time and distraction of fundraising, giving you more time to devote to running and growing your business. And if it turns out that you do need outside funding, bootstrapping can put you in a position to get the funds you need and use them more effectively and efficiently.
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