News

Bootstrap Your Way To Business Success

Do-It-Yourself Financing Is Back!

By Don Sadler

“It takes money to make money,” the old saying goes.

But in today’s tight credit climate, getting the money needed to grow and expand a business has become difficult, if not nearly impossible—at least from traditional financing sources like banks and private investors.

In this environment, many micro-business owners and self-employed individuals are turning instead to a different kind of financing that’s really not financing at all. Known as bootstrapping, it involves generating cash internally rather than borrowing it from an external source such as a bank.

How do these owners bootstrap their way to success? Primarily by tightening up financial management practices.

The dictionary definition of bootstrap is “to rely entirely on one’s efforts and resources,” which is an apt description of financial bootstrapping in the business world.

“From my past experiences, I’d rather build value in my business myself from the bottom up than build it from raising capital and then playing catch-up,” says Brandon White, the president of Lateral Line Inc., a performance fishing apparel business based in Easton, Md.

White and his brother have been bootstrapping Lateral Line for the past three years, leveraging cash flow to grow the business.

“There is a time and place to raise money,” White notes, “but bootstrapping is the way to start. While it may seem like a badge of honor to have raised venture capital, the real badge comes from creating and building a profitable business yourself.”

Josh Turner, principal at Gateway CFO Solutions LLC, a financial consulting firm in St. Louis, Mo., says the current credit crunch has caused bootstrapping to go mainstream.

“I work with a lot of small-business owners, and I’m a small-business owner myself, and I can tell you that bootstrapping is the norm in today’s economic climate,” Turner says.

“Traditional bank debt and lines of credit are very difficult for most small businesses to obtain, which often makes internal funding via bootstrapping the only financing option.”

Bootstrapping activities are limited only by your imagination, but usually fall into one of three categories.

1.Credit and Collections
Tighten Up

Failing to tighten credit and diligently go after outstanding accounts receivable is analogous to leaving cash on the table.

Start by establishing a credit policy that spells out the specific criteria by which you will and will not grant customers the right to pay their bills after they’ve received your product or service.

For instance, you could give customers 30 days to pay their bills before you consider their accounts overdue.

While being proactive on the front end will help you avoid extending credit to high-risk customers, it may not eliminate deadbeats completely. The key to collecting past-due receivables, experts say, is to move quickly—because the longer they drag out, the less chance you have of ever collecting them.

So if your payment terms are net-30 days, and a check hasn’t arrived on day 31, contact your customer immediately.

Karl Hoffower, the director of business development for Failure Prevention Associates in San Jose, Calif., goes one better: He calls net-30 customers twice even before the payment due date.

“We make the first call three days after the invoice is sent to make sure the accounts payable department got the invoice,” he explains. “Then we call again at 20 days to make sure that the invoice is in line for payment at 30 days. This way, we have time to work out any potential problems in a timely manner.”

Need to speed up collection of your accounts receivable? Follow these tips.

• Send out invoices immediately. Ideally, this should be done as soon as goods are shipped or services delivered. Each day you wait is a day’s cash flow that is lost.
• Clearly state payment terms and the due date on the invoice. Don’t assume customers know when a payment is due. If your terms are net-30 days, count out 30 days from the invoice date and include this due date next to the amount due.
• Follow up on past-due receivables promptly. Studies show that the likelihood of collecting receivables drops drastically over time. You have more than a 90-percent chance of collecting after 30 days. But after 90 days, your odds of collecting the amount due drop to 74 percent. And after six months, you have just a 50-percent chance of collecting your money.

2. Payment Terms
Use Them To Your Advantage

In the same way that you may offer payment terms to your creditworthy customers, your vendors and suppliers may also offer such terms to you.

Not taking advantage of them is the same thing as saying “No, thanks” to a short-term, interest-free loan.

Keep in mind that most suppliers will want to see a history of on-time payments from your business before extending payment terms, especially if yours is a startup company.

However, if you can produce a solid business plan that demonstrates you have a keen understanding of your company’s finances, you may be able to negotiate payment terms upfront.

You might be able to create your own terms by paying suppliers and vendors with a business credit card (assuming they accept plastic). If you pay off the balance each month before the due date, a credit card also becomes an interest-free short-term loan. Keep in mind, however, that the interest rate can be high if you don’t pay the balance in full each month. Also be sure to make payments on time, since card issuers can jack up the interest rate drastically based on just one late payment.

3. Cost Cutting
Look At Every Expense

If there’s a silver lining to the painful recession of the past couple of years, it’s that most businesses have a newfound respect for cost cutting.

Janet Boulter is president of Center Consulting Group in Denver, Colo. Her firm helps companies improve their business practices and profitability. She tells her clients to look in every nook and cranny for potential waste.

“Take a fresh look at the products and services you purchase, everything from office products to cell phone plans, and re-evaluate the benefits,” she advises.

Among her specific recommendations:

• Renegotiate your office lease and/or sublease your unused office space. It’s a tenant’s market in many areas of the country right now.
• Scrutinize travel expenses. Can you replace some face-to-face meetings with video conferences instead?
• Reexamine subscriptions. Make sure that they’re providing enough value to justify their cost.
• Pare back entertainment. Do you really need to take clients out to fancy and expensive dinners or concerts? Most won’t be offended if you scale this back a little.
• Use technology to increase productivity. Trying to save money on technology can be penny-wise but pound-foolish. Updating old computers and software can pay for itself quickly through increased productivity.

George Burke, a co-founder of BookSwim.com, the popular online book rental club, says the company was launched with just $7,000 in startup capital.

“Since the beginning, some of our biggest challenges have revolved around growing and operating the business
without spending much money,” he says. “Although we’re a multi-million dollar company now, we still keep a close eye on expenses in all areas of the business.”

A few of the cost-cutting measures Burke and his partners implemented during the startup phase:

• Operating out of a partner’s basement instead of leasing expensive warehouse and office space
• Using intern labor, primarily college students working between classes and during holidays
• Hiring a website developer in Romania to build the company’s initial site and inventory management software for $3,500 (compared to quotes of nearly $100,000 from similar U.S. developers)
• Furnishing its offices with Craigslist free and “curb alert” postings

What about marketing, you may ask?

This is one of the first areas where business owners often look to cut costs. But experts urge caution.

Making the wrong cuts here can significantly impact sales and revenue. Instead, take a close look at the effectiveness of your marketing programs. Reduce or eliminate any that aren’t generating measurable results. Here are three practical ideas for stretching your marketing budget.

• Use online review websites. Satisfied customers may be the best advertising money can’t buy. You can maximize your word-of-mouth marketing efforts by asking customers to post feedback about your business on an online review website. These sites allow customers to post reviews and buyer ratings on a company’s performance and/or the quality of its products and services.
• Maximize your public relations efforts. It costs little or nothing to publish press releases about interesting developments at your business and distribute them to the local media. Also, try writing bylined articles about trends and developments in your industry and submitting them to trade publication editors.
• Reduce your ad size and/or frequency. This can help you save money without sacrificing results. Brainstorm with your advertising sales rep for ways to save money while still generating qualified leads.

The Bottom Line Of Bootstrapping

Deborah Osgood is co-founder of CKO Knowledge Institute in Exeter, N.H. For the past decade she’s also been a volunteer with SCORE, the nonprofit association that counsels entrepreneurs.

“The fact is that eight out of 10 businesses are started without outside financing,” Osgood says.

She encourages micro-business owners to “draw a straight line to the revenue—what sells, how much, and where and when does it sell? The sooner owners understand that it’s revenue that sustains a business, the sooner they’re off to a long a prosperous venture.”


Don Sadler is a self-employed writer who bootstraps his freelance writing business by promptly invoicing his clients and diligently following up on receivables. Reach him at don@donsadlerwriter.com.