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business,expandyourbusiness6SourcesofBootstrapFinancing

READY TO LAUNCH

6 Sources of Bootstrap Financing

Whether you're just starting out or you've been in business for years, if
bootstrapping ideas.

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AMEEN KHWAJA
CONTRIBUTOR

Contributor

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When you're thinking about how to raise money, one of the rst things you should cons

money to get your business o the ground. This is one of the most popular forms of inte

utilize all your company's resources to free additional capital to launch a venture, meet

Bootstrap nancing is probably one of the best and most inexpensive routes an entrepre
unused opportunities that can be found within your own company by simply managing

to pull yourself up without the help of others. You are the one nancing your growth by

There are a number of advantages to using the various methods of bootstrap nancing:

Your business will be worth more because less money has been borrowed, and the
You won't have to pay the high interest on borrowed money.

Coming from a stronger position (with less debt on hand), you look more desirabl
does come to raise money through these routes.

You can be creative in nding ways to raise prots, without having to look to exte
of business savvy.

Trade Credit

The rst source of business money we'll discuss is trade credit. Normally, a supplier will

for 30, 60 or 90 days, without charging interest. For example, suppose that a supplier sh

days but you have trade credit or terms. Your terms might be net 60 days from the recei
extra days to pay for the items.

However, when you're rst starting your business, suppliers aren't going to give you tra

order c.o.d (cash or check on delivery) or paid by credit card in advance until you've esta

this is a fairly normal practice, to raise money during the startup period you're going to

suppliers. One of the things that will help you in these negotiations is a properly prepar

When you visit your supplier to set up your order during your startup period, ask to spe

small company. If it's a larger business, ask to speak to the chief nancial ocer or any

yourself. Show the ocer the nancial plan that you have prepared. Tell the owner or
that you need to get your rst orders on credit in order to launch your venture.

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The owner or nancial ocer may give you half the order on credit, with the balance du
your goods shipped to you, and sell them before you have to pay for them yourself. You

inventory, but you would have to pay interest on that money. So trade credit is one of th
working capital you need. This is especially true in retail operations.

Despite the urge to use trade credit on a continual and consistent basis, you should cons

small, short-term needs. Do not look at it as a long-term solution. By doing so, you may

suppliers who accept extended credit terms. As a result, the business may no longer hav
suppliers who might oer lower prices, a superior product or more reliable deliveries.

The Cost of Trade Credit

Depending on the terms available from your suppliers, the cost of trade credit can be qu

purchase from a supplier who decides to extend credit to you. The terms the supplier o

days and a net date of 30 days. Essentially, the suppliers is saying that if you pay within
two percent. On the other hand, by forfeiting the two-percent discount, you are able to

annualized basis, this is actually costing you 36 percent of the total cost of the items yo

days = 18 times per year without discount; 18 ( 2 percent discount = 36 percent discount

Cash discounts aren't the only factor you have to consider in the equation. There are als

you extend payment beyond the agreed-upon terms. These can usually run between one
your net payment date for an entire year, that can cost you as much as 12 to 24 percent

Eective use of trade credit requires intelligent planning to avoid unnecessary costs thr

of delinquency penalties. But every business should take full advantage of trade that is a
its need for capital from other sources.

Factoring

This is a nancing method where you actually sell your accounts receivable to a buyer s

capital. A "factor" buys accounts receivable, usually at a discount rate that ranges betwe

the creditor and assumes the task of collecting the receivables as well as doing what wo

be performed on a non-notication basis. That means your customers aren't aware that

There are pros and cons to factoring. Many nancial experts believe you shouldn't attem

necessary capital from other sources. Our opinion is that factoring can be a very good
costs associated with maintaining accounts receivable such as bookkeeping, collections
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expenses against the discount rate you'll be selling them for, sometimes it even pays to

factor only takes on part of the paperwork chores involved in maintaining accounts rece
of the time, the factor will assume full responsibility for the paperwork.

In addition to reducing your internal costs, factoring also frees up money that would oth

businesses that sell to other businesses or to government, there are often long delays in

be used to generate prot through other avenues of the company. Factoring can be a ver
owing.

Customers

Customers are another source of bootstrap nancing, and there are several dierent wa

way to use your customers to obtain nancing is by having them write you a letter of cr

business manufacturing industrial bags. A large corporation has placed an order with yo

supplier from which you will obtain the material the bags is located in India. In this scen

customer when the order is placed, and the material for the bags is purchased using the
up a penny to buy the material.

In your personal nancial dealings, you may have had a builder, or someone else workin

the materials for your job. That contractor used your money to get started on the job. Yo
This is how customers can act as a form of nancing.

Real Estate

Another bootstrap nancing source is real estate. There are several ways to take advanta
facility. This reduces startup costs because it costs less to lease a facility than it does to
be able to arrange payments that correspond to seasonal peaks or growth patterns.

If you enter a business for which you will need to buy the facility, your initial cost will in

nanced over a long-term period of 15 to 30 years. Again, the loan on the facility can be

growth or seasonal peaks. For instance, you can arrange a graduated-payment mortgag

with the cost increasing over the lifetime of the loan. The logic here is that you have low
grow. Eventually, you can renance the loan when time and interest rates permit.

Another advantage that the outright purchase of the facility will provide you is continui

the decrease of your principal amount to create a valuable asset called equity. You can bo
up to 75 or 80 percent of the property's value once it's been appraised.
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This applies to any private real estate you might own. If you have a desire to get into bu

in any other way, you may have to borrow against the equity in your home or sell it alto
estate is a good venue to choose. If it's depreciating, it won't be quite as attractive.

Equipment Suppliers

If you spend a lot of money on equipment, you may nd yourself without enough worki

months. Instead of paying out cash for your equipment, you can purchase it with a loan

equipment over a period of time. In this way, equipment suppliers are a source of bootst
Two types of credit contracts are commonly used to nance equipment purchases:

1. The conditional sales contract, in which the purchaser does not receive title to the equip

2. The chattel-mortgage contract, in which the equipment becomes the property of the pu
mortgage claim against it until the amount specied in the contract is paid.
By using your equipment suppliers to nance the purchase of equipment you need, you

There are also lenders who nance 60 to 80 percent of the equipment value. And then, o

down payment on a new purchase. The loan is repaid in monthly installments, usually o
piece of equipment.

Leasing

Another thing for you to consider is to lease instead of purchasing. Generally, if you are
leasing arrangement when you're starting up a new business, it's much better to lease.

rather than pay $3,000 for it; or lease your automobile or van to avoid paying out $8,00

Leasing has been around for a long time. It's common for businesses to lease real prope

plant, farmland, etc. There are advantages for both the small-business owner using the

of that property or equipment (the lessor.) The lessor enjoys tax benets and may gain f

as making a prot from the lease. The lessee benets by making smaller payments, reta

at the end of the lease term, and may be able to negotiate build-in maintenance provide

Still, there are many ways that a lease can be modied to increase your cash position. T
A down payment lower than 10 percent or no down payment at all.

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Maintenance costs that are built into the lease package, thereby reducing your wo

or a repair person to do maintenance on purchased equipment, it would cost you m

Assignment of all executory costs such as insurance, property taxes, etc. While thi
reduce the amount of taxable income the business generates.

Extension of the lease term to cover the entire economic life of the property. Use o
you wish to use it.

A purchase option, which can be added to the lease allowing you to buy the proper
purchase price can also be added to the option provisions.

Lease payments that can be structured to accommodate seasonal variations in the

create an adjustable lease.

Avoid the Need for Financing

Bootstrap nancing really begins and ends with your attention to good nancial manag

needs. Be careful and aware when you buy. Make sure that you don't go top dollar when

overly expensive oce or location, unless it's really going to pay o in dollars and cent
and you have an opportunity to buy a used desk, then by all means do so.

Also, keep a close watch on operating expenses. If interest rates are high, it won't take t

an 11- or 12-percent interest rate, carrying an unpaid $10,000 is costing you as much as

One way to foster a protable cash ow for your rm is to start each production order o

payment plan . Negotiate terms and conditions that require payments when you want th
establish and execute timely cash-ow concepts into every order.
This article was excerpted from The Small Business Encyclopedia.

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