You may want to start a business but do not have enough money to do so. Are you out of luck? Nope. Actually, it is safe to say that most businesses start with less than optimum funding. According to the Small Business Administration (SBA), 60 percent of all new businesses begin as under capitalized startups. So you are in good company.
But what it will take is hard work, pluck, and a tad of luck. Creating a shoestring business begins with finding the necessary funding (discussed in this chapter), setting up shop and stocking the store for less (Chapter 14), and then getting people in the door without spending a fortune (Chapter 15).
Ten Rules for Bootstrapping a Business
If you are going to bootstrap a business, there are some rules of the road you should know. As you go about getting the money you need to get started, it will help enormously to keep these ten tips in mind.
Rule 1: You don’t need a fortune to get started. It would be great if you had enough money, but just because you don’t, it doesn’t mean that you can’t start a business. Real estate is a great example of this principle. By using a 3 percent FHA loan, you could buy a $100,000 duplex apartment house with a $3,000 down payment. That is pretty darn close to nothing. Even without 97 percent of the money needed, you could start a real estate business.
Rule 2: Not all debt is bad debt. This is an adjunct to Rule 1. If you don’t have enough money, then it is possible that you may have to incur debt to get going. But not all debt is bad debt. Some debt is good debt when it enables you to get ahead in life—to start a business, buy a home, finance college, etc. Most millionaires start out deeply in debt to finance their dream. Is it ideal? Of course not. But if you can take on some debt and see a way to pay it back through your business, it’s not a bad option.
Rule 3: Be frugal. As an employee, you can waste supplies, make longdistance calls, use FedEx, make too many copies, and spend your management budget without a second thought. But as a businessperson on a budget, you will have to learn to be lean and mean.
Rule 4: Invest only in your best ideas. Remember that no business survives unless it is serving a market need. You may have many ideas, but faced with less money than ideal, you cannot afford to make mistakes. You must invest your time, money, and energy in only your best, most profitable ideas.
Rule 5: Do what it takes. If you only are going to have 25 percent of the money that you need to start, then you must be willing to put in the other 75 percent in the form of time and effort. You will have to work harder and smarter than your competitors. You have to be willing to go the extra mile as a bootstrapper.
Rule 6: Look big. You may be starting a business out of your garage with no funds, but no one needs to know that. It is critical to your success that you project the image of a big, professional business. Until the business does get big and have some money, remember these two important words: Fake it!
While you can take out cash advances from your credit cards to start your business, be careful. The credit card trap is easy to fall into but very hard to get out of. You know the trap, don’t you? It follows this pattern:
- • You charge for things you otherwise cannot afford or take out cash you have no way of paying back.
- • You run up balances on cards that charge you 18 percent interest (and up!).
- • You pay only the minimum due each month, covering only the interest and service charge each month.
- • You get stuck with a debt that never seems to go down.
Here’s how to get out of the trap:
- • After you have run up your cards, transfer all balances to the card with the lowest interest rate. This can save you a lot of money every month.
- • Better yet, apply for a new card with a really low introductory “teaser” rate (e.g., 4.9%) and transfer all of your balances to that card.
- • Once the teaser rate is set to expire, call that company and tell them that you will cancel the card unless they extend the rate for another six months. If they don’t agree to do so, cancel the card, apply for another new card with a great rate, and transfer the balance again. This balance transfer dance can save you a ton of money.
- • Pay off the total balance as soon as possible and always pay more than the minimum.
Rule 8: You gotta believe! Northwestern University conducted a study of successful shoestring entrepreneurs and discovered that they typically never owned a business before, had no business education, and, of course, didn’t have enough money to start but did anyway. In short, they didn’t know enough to be afraid.
Rule 9: Have a passion. Wayne Huzienga started very small and eventually created Blockbuster Video, among many other businesses. Says Huzienga, “I don’t think we are unique, we’re certainly not smarter than the next guy. So the only thing I can think of that we might do a little differently than some people is we work harder and when we focus in on something we are consumed by it. It becomes a passion.”
Rule 10: If you take care of your customers, your customers will take care of you. You may not have as much money as the next guy. You may not have ads as big or a fleet of salesmen, but that does not mean you cannot be the best. One of the best ways to be the best is to offer personal, superior service to your customers.
OPM
While it is difficult to start without enough money, it can be done. A far better solution when you don’t have enough money to start a business is to get enough money using OPM—other people’s money.
Finding people who will be willing to invest in you will take determination; it usually isn’t easy. Without collateral, perseverance will be essential. Why? Because lenders and investors are skeptics, and they should be. Too many startups fail, so, accordingly, investors would rather put their capital into successful businesses that want to expand or startups that have already been partially funded. The unfunded startup is the riskiest investment of all.
But it is also, potentially, the most lucrative, and you can use that fact to your advantage. If you are willing to share your pie, have a plan that makes economic sense, and are willing to look long and hard, the right investor can be found. It is the possibility of a big return on their investment, coupled with the ability to write off a loss on their taxes, that makes the rich investor a viable alternative for the cash strapped entrepreneur.
Providing Great Customer Service
- • Ask your customers what they want and then give it to them. Survey your clients and customers. Find out what you are doing right and wrong. Change what needs to be changed.
- • Train your employees. Your employees will not know what is expected of them until you teach them.
- • Empower your employees. Give employees the room to solve problems on their own. For instance, at Outback Steakhouse the wait staff can offer patrons free drinks, appetizers, or meals when something goes wrong, without asking a manager.
- • Reward your employees. Employees who make customers happy are making you money. If they are rewarded for a job well done, that behavior will be reinforced.
- Do more than expected. Going above and beyond the call of duty endears you to clients. Do so consistently and your business will take off.
The key to winning over an investor or other lender is to look like a pro. Talking big without backup facts will make you look a fool. Instead, come in looking like a businessman who understands business. You need facts, data, and hard figures that back up your rosy rhetoric. You must know:
- How much you really need
- Why you need that much
- How much you can afford to pay back every month
- How you will make that amount
If you can answer these questions confidently, then it is time to go over your options because there are many ways to finance your business using OPM.
■ Structuring the Deal
When structuring a loan or investment deal, keep these points in mind:
- How much mo option? Be picky. If you can get one lender/investor hooked, you can probably get others.
■ Bootstrapping Your Product
Here are three ways to bootstrap your way into new product development:
- Work on your product at night and over the weekend while keeping your “day job.”
- Get current customers to fund research and development.
- Get customers who will be using the product to prepay for licenses or royalties.
Option 1: Find a Partner
Often, the best businesses are those that are started by two people of different backgrounds with different skills sets. You may be a marketing genius but know nothing about finances, and you may have a friend who is financially literate but knows nothing about business. Together, you may make a great team. Martha Stewart has a woman she works with named Sharon Patrick, a steady woman who helps run the empire. Martha likes to compare Ms. Patrick to Jeep—solid and dependable. Many entrepreneurs need their own Jeep, yours just happens to be one who has money, that’s all.
■ Real Life Example
In 1930, Chester Carlson landed a job in the New York City patent offices of a small electronics company, where he assembled patent applications. Patent applications are extremely long documents, and Carlson’s job of duplicating the drawings and specifications was boring and tedious. Frustrated by his day job, and already prone to inventing, Carlson decided that there must be a better way.
He began to study photography, the physics of light, paper treatment, and printing. His research paid off when he stumbled upon photoconductivity—the method in which light affects the electrical conductivity of materials, thereby allowing him to reproduce documents electronically. Hoping to find a corporate sponsor for his invention, or even someone to whom he could sell it, Carlson spent the next few years meeting with and getting turned down by the likes of GE, RCA, and IBM. He had no luck; he was a genius, but not a marketer.
The break Carlson had been hoping for came in 1947 when Joe Wilson, the president of a small photographic company called Haloid and a marketing wiz, came to see the electronphotograhy machine he had read about. After seeing a demonstration, Wilson exclaimed, “Of course, it’s got a million miles to go before it will be marketable. But when it does become marketable, we’ve got to be in the picture!” Wilson and his company eventually pumped $100 million and ten years into the invention before finally turning Carlson’s idea into a workable machine. Deciding that “electron photography” and Haloid weren’t snazzy enough names, the marketing wizard decided to rename the process and the company Xerox.
■ How to Find a Partner with Money
- Networking is essential. Put the word out to your lawyer, accountant, and banker that you are looking for a business partner.
- Speak with friends, family, colleagues, and people where you worship. Word of mouth has found many partners.
- Speak also with suppliers and distributors for possible leads.
- People in your line of work who have retired may be interested in being either a working or silent partner.
- Look online. Try <www.businesspartners.net>.
- Advertise. Most classifieds sections of most newspapers have a Capital Needed section. Also look under the Capital Available section.
When looking at potential partners, keep in mind that entrepreneurship is a risk. Your venture may not succeed, so be extra careful about partnering with friends and family members. Owing money to a close friend or family member after a business goes south is not a pleasant experience.
The important thing to remember when looking for a partner is that you will get the money you desire only if the partner gets what he or she wants. Does he want to be involved in daytoday operations? If so, you better be sure that this is someone with whom you can work. Does she just want a return on her investment? Then you better have a solid financial plan. Ask them what they want and then give them what they want.
Option 2: Distributor and Supplier Financing
Distributors and suppliers want your business. They want you to become a lucrative, repeat customer. As such, they know that one way to do that is to help you get started. If you seem solid and creditworthy, getting a startup loan from a distributor or supplier is not out of the question.
Given that most industries are very competitive and have numerous suppliers, it may even be possible to negotiate one against the other to see who will offer you the best deal. Your best bet is to focus on the largest suppliers in your field and make a sophisticated, professional pitch to them. Yet, who knows? It may be that a newer, smaller distributor may be more anxious to earn your business and will be more amenable to the pitch. When you are a bootstrapper, you have to be willing to fall down to succeed.
■ How Supplier Financing Works
Before a supplier helps finance your business, it usually will visit your site, research your reputation, contact your bank, and call your references. It will want to be sure you are someone of honesty and integrity.
Again, the key to success is preparation. An idea is not enough. Have a solid presentation ready that explains how your great business plan can benefit the supplier’s bottom line. Show the need for your service or product. One of the best things you can do is get some preorders and go back to the supplier and explain that you need financing to fill those orders.
Option 3: Franchisor Financing
Finding a franchisor that will finance 50 percent or more of a franchise is very possible. According to the International Franchising Association, roughly 33 percent of all franchisors offer some type of financing. That means the franchisor will finance at least part (and sometimes all) of the franchisee’s investment requirements.
Franchisor loans can be structured a variety of ways. Some offer interest only loans with a balloon payment due in five years. Others offer loans that require no payment at all for the first year. Some franchisors finance everything, while others offer loans for the franchise fee only. It all depends upon you and the franchisor, so you have to ask. Another option is that most franchisors work with banks and other lenders with whom they have longestablished relations. These preferred lenders may also be able to help. Other franchisor alternatives, aside from direct financing, include loan guarantees or working capital.
Finally, in addition to helping with the startup costs, many franchisors usually have arrangements with leasing companies for the equipment needed to run the franchise. This can be a major expense, so don’t overlook this possibility.
Option 4: Venture Capital Firms and Angel Investors
As discussed in Chapter 9, individuals who have made a lot of money often want to invest it. Venture capital firm investments usually start at $500,000 and go up from there. Angels are hard to generalize, but investments of $50,000 and up is not far off.
The main thing that these sorts of investors look at is the management team of the enterprise. They know that their investment is only as good as the people running the business.
Other things they will look at include:
- The ability to become highly profitable and dominate an industry
- Strong leadership
- Experience, tenacity, commitment, and integrity
- Innovation
- A great product
The Web is the best place to find these sorts of investors. Some sites you might try are:
Option 5: Seller Financing
A final option for starting a business on a shoestring is to buy an established business and have the seller finance all or part of the purchase. Seller financing is actually quite common in the sale of small businesses. While there are many reasons for this, including lack of bank financing, seller financing is an option because it offers benefits for both the buyer and the seller.
For the buyer, seller financing reduces the risk that the business is successful only because of the present owner’s contacts or specialized knowledge. If you wanted to buy a music store for example, there is a possibility some customers may not remain loyal without the longestablished owner on the premises. But seller financing alleviates this fear. By having the seller finance part of the purchase price, it tells you that he believes the business can thrive on its own.
From a buyer’s perspective, seller financing not only indicates that the seller believes in the business, but it also allows him or her to make a better offer for the business, which is good for the seller.
It is likely that a seller will want the buyer to secure the purchase with some collateral. Just as a bank has the right to foreclose on a home if you default on the mortgage, business owners usually want to be able to “foreclose” on the business if you default. That is a small price to pay though for the chance to buy into an established business.
Seller financing may cost you a bit more, but, overall, it can help both sides and should work out fine as long as both parties do their homework and deliver what is promised.
T H E B O T T O M L I N E
Reread “Ten Rules for Bootstrapping a Business.” The bootstrapping entrepreneur will likely have to work harder, longer, and more creatively if he or she is to get funded. But it can happen. By tapping into OPM, you can start a business, even if you have little in the way of capital to contribute
