Entrepreneurial 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.

Emad Rahim

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.

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5. Sign a lease agreement

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.

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.

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

6. Seek cash from family and friends

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.

7. Tap into your savings

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.

9. Reduce operating expenses

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.

10. Be a jack-of-all-trades

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.

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.

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