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Bootstrap Financing – 4 common ways and 3 uncommon ways

Guest post by: Joseph Lizio

Article Overview: Start up businesses struggle finding capital to launch their business. Banks won’t touch them and they usually don’t have the personal strength to qualify for SBA or similar loan products. But, that does not mean they have to give up on their dream.

Bootstrap Financing – 4 common ways and 3 uncommon ways

Banks and most other lenders very rarely finance start up or early stage businesses. It is just too risky for them. Further, most lenders (venture capitalist and angel capitals included) want to first see that the business owner has taken the business as far as they can without outside capital; demonstrating that the business owner is willing to take as much risk in the business as they are asking lenders or investors to take.

To that note, most businesses are force to self-finance their new businesses; termed "Bootstrapping".

Bootstrapping, while not the preferred way for most entrepreneurs to capitalize their businesses, is usually the only way or option they have.

Common bootstrapping techniques:

1) Personal Assets: Personal assets, such as saving accounts, equity in a home, a vehicle that is paid for, etc. can be used to obtain capital. For home equity or vehicle title loans, the asset is pledged as collateral in the event that the borrower defaults on the loan agreement. Further, other personal assets can be sold off to obtain cash. Liquidating personals assets like boats, fine art, second homes, and even life insurance policies is a very cheap way to raise needed capital for your business as there is no loan or interest payments that need to be made.

2) Personal Credit: Some borrowers with outstanding credit histories can leverage their credit scores for unsecured personal loans or lines of credit. This can be from using personal credit cards (which are essentially personal lines of credit) or from traditional loans products like unsecure personal term loans or unsecured personal lines of credit. Keep in mind that even if you don't qualify for these products with your bank - credit unions and non-bank lenders offer these products and tend to provide easier and faster approvals.

3) Friends and Family: If you believe in your business idea and have friends and family members who believe in you, you might be able to entice them in either investing in your business for partial ownership or providing you with funding in the form of a loan. There are times that working with friends and family can be a bit taxing but your friends and family may also be more flexible then traditional lenders.

Additionally, should your friends and family not have the wherewithal to help fund your business - it does not mean that you should not ask them. If these people believe in you, they may have their own circle of friends and family members that they could ask to invest in your business. There are countless stories of businesses receiving investments through family members who contacted old college buddies on the business owner's behalf.

4) Continuing to work: Work part- or full- time and run your business during the time you are not at work. Not only will this help you self-fund your business but it can also help you cover your personal expenses during the time it takes you to get your business to the point that it can take care of both you and itself.

While these are some of the most common methods of seeking start-up or bootstrap financing for businesses, there are countless more ways. You just have to be willing to get creative and find ways to get the financing your business needs. There is value in almost anything; even things you think are valueless. Remember, one man's trash is another man's treasure.

Moreover, the following are three uncommon ways you may find to bootstrap your business. These methods are not usually available to every business owner but, you may find that they fit your individual status or unique situation:

1) Loans against retirement accounts. Many potential business owners have worked for years for someone else and have created substantial retirement accounts in the form of 401(K) plans or IRAs. There are several ways that business owners can roll these investment vehicles over into their new business's retirement plan and borrow those funds tax-free. Or, you can easily convert your retirement plan into a 401(K) trust and order the trust to invest in your business.

2) Putting the cart before the horse: For some businesses, the entrepreneur can simply go out and drum up business (i.e. get product orders, service jobs, or contracts) even before they have the means to satisfy those jobs or those customers. Then, with contracts or orders in hand, seek financing based on the value of those orders. There is purchase order financing that is specifically designed just for business owners in this circumstance. Further, many lenders may capitalize your business based solely on the strength of those orders - even if you are a start-up - by using those orders as collateral against a loan or advance facility.

3) Customer Financing: Depending on your business, when customers order your product or service, you can require them to pay something up front (usually an amount that covers your business's variable costs). Thus, you receive the funding to complete the order. Then, when the customer pays the remaining amount, your business has additional working capital to complete other orders or cover its overhead.

The bottom line is if you want your business to work, to provide you with all the positive rewards that business ownership can afford, then you have to do what it takes. And, for many new business owners that means finding creative ways to bootstrap the business until it reaches a point that it becomes creditworthy in the eyes of more traditional lenders.

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Article Tags: bootstrapping, business, capital, financing, lenders, start up



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