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Starting and operating a business with little or no money, or assistance from outside investors, is entirely possible. Small business finance is a minefield for entrepreneurs. Before you try to raise a loan or seek capital, give financial bootstrapping a try. The chances are you’ll be able to come up with creative ways to avoid giving away equity or pay high interest rates, while having more cash to build the business.

Financial bootstrapping is not only a means for creating your own seed capital, but also offers the lowest-risk way of financing a startup enterprise while maintaining your greatest freedom of action. According to the Wells Fargo/Gallup Small Business Index (2006), entrepreneurs started their businesses with an average of $10,000. So you will not be the only one using financial bootsrapping.

There are many ways to keep working capital in the cashbox. When you’ve read about those below, you’ll be able to come up with many more.

Sales is Job #1―Get the Cash Flowing

There are plenty of tools for the boostrapper to keep money in the cashbox. But before delving into the toolbox, make sales the most imperative job. Be sure to over-deliver and not over-sell. Satisfied clients will come back for more and tell their friends, allowing you to reap sales with much less effort than the first time around. Of course, you must have long-term goals, but you should make “next week” your time horizon. This will ensure that you focus on short-term cash sources. Generating revenue is the best way to get seed money, as well as other benefits like customer feedback, which helps you refine your offer. Ensure that your sales prices allow a generous gross margin. Low prices can often kill a new business.

You may be tempted to wait until your product is perfected. This is a mistake, unless you are in a highly regulated or technological market. Get out and sell on the basis of what you know you can deliver. Also, give thought to selling a service initially. You may have a great product concept, but not the cash to go into production, but since you have great know-how, why not sell the knowledge and experience in order to generate the revenue to fund manufacturing?

If you put sales at the top of your priority list, marketing is a close second for your attention. Do a little marketing every day and you’ll be surprised how the actions mount up. Prepare a marketing plan. This should not involve a big budget. You can do it on a shoestring, like getting press coverage, for example; it costs nothing but your time and some careful preparation. Make sure you get help to prepare your press material. There’s plenty of advice on the Web. You can use PRWeb (, or you can start with your local press or the journals that cover your industry and expand from there. You can design and print your own stationery (business cards come first). You can organise seminars―get an early customer to speak about experience with your product.

When thinking about both sales and marketing, keep the cost of customer acquisition as economical as possible. It’s going to produce no extra seed money if the cost of getting a sale outweighs the margin you’re going to make. There’s nothing wrong with using budget hotels or staying with friends if you have to travel. Use your contacts and build your network. Find out you if can piggy-back on the promotion of others, such as taking part of stand belonging to an associated business at a trade show.

Invoicing and Terms to Conserve Cash

Even when you have revenue, there are still many other ways that you can have cash in the business to spend on necessary development. Some of these practices may seem obvious, but are very often neglected in startup businesses. Invoice on time or even early. When the invoice is prepared, make sure you know to whom it should be sent (in the accounts payable department is best). But take care: the customer company may have special procedures for approving invoices, so follow their rules.

Ensure that your customers pay within thirty days. There’s no point in your new business playing banker to established firms. You can do this without being aggressive. For instance, try calling a week before the invoice is due to be paid and ask the person responsible in the customer’s accounting function if the bill is correctly formatted―and while you’re at it, find out which day of the month the company does its check run, so you’ll know for the future. If there’s a difficulty, go back to your buyer and clear it up. If you’ve made it plain at the outset that you have a 30-day settlement period, there should be no problem. Hesitating to contact the customer will cost you money.

Here’s an example: The working capital required to finance monthly sales of $10,000 with an average settlement period of 45 days is $15,000. If the settlement period stretches to 60 days, you need an extra $5,000 in the business. By this simple illustration, you can see how much easier it is to have $10,000 in the business by getting settlement in 30 days than it is to go to the bank for a $10,000 loan on which you have to pay interest. Just imagine that you get a loan of $20,000 at 15% interest. Your monthly repayments would be more than $1,800. If you miss a month, the interest will compound and soon the bank will want the whole amount repaid.

When you’re closing a sale, have a checklist of administrative questions, rather than rushing straight out of the door to celebrate. Can part-payment be up-front? Is electronic payment of invoices possible? Would a discount of, say, 5% be acceptable for regular purchases or subscriptions settled by automated means?

Purchasing Parsimoniously

As well as raising the bridge by selling, you can lower the water by buying―effectively. There are some big choices that will effect your cash and thus your seed money. Look closely at the relative costs of leasing vs. buying, or buying second-hand or re-conditioned equipment. Maybe bartering or reciprocal trade would be possible in equipment and services, or between the two. There are several ways to find barter opportunities on line, such as Bob Meyer’s Barter News (

Examine the different costs between cash discounts (if they are offered) and extended credit rates. Your cash flow may be the determining factor here; if you don’t have the money now, you’ll have to have extended credit or find another solution. It could be that you don’t need to own the equipment at all and you could sub-contract the work at lower cost. Perhaps collaboration is a possibility; you could buy the equipment together with another user if you’re not going to need to use it full-time.

As well as being parsimonious in purchasing, take care to avoid carrying excessive inventory. In very few cases, it may be necessary to carry a safety stock if supplies are difficult to procure. Occasionally, there may be an opportunity to buy bulk at heavily discounted prices, but even there, it’s as well to calculate how much of a bargain it may really be. If the money is sitting idle while it’s tied up in stock, the bargain may cost you dearly. In manufacturing, too much work in progress―or in retailing, slow stock-turn―can ruin a business very quickly. Inventory can lie about depreciating, and hiccups in getting finished goods out the door can gobble cash like a hungry wolf.

Try to run the business with low variable costs. Fixed costs are those that you cannot avoid, but if there are options, aim to rein in your desires. ‘Nice-to-have’ purchases can wait until the positive cash balances can take the strain. Variable costs include almost all non-essential services, such as media advertising.

A very large area of purchasing parsimony is in information technology. There is a huge raft of free (and good) programs available. One group of products are the open source products, such as word processing, spreadsheets and the other standard routines from In many cases, these products are superior to proprietary brands. Another group is the ‘cut-down’ or ‘earlier’ versions of software that are made available for free. You may not need the bells and whistles of the very latest version. One of the latest developments is web-based software, where you don’t buy the software but access it on line. In this way you have no up-front outlay and always have the most recent version of the program available.

Outsourcing Can Save Over Insourcing

Many businesses shy away from outsourcing, especially since outsourced overseas call-centres have often received a bad press. It does not have to be that way and as an indicator, 400,000 US tax returns were prepared in India in 2005 (McKinsey Quarterly). There are good outsourcing information sources on the Web (e.g., More frequently still, companies use outsourced payroll and bookkeeping services. A good firm has the experience and can do the work much more easily and cheaply than you can. You can always take the work back in-house when the business has grown and cash or time is at less of a premium. In fact, any so-called ‘back-office’ jobs can often be outsourced effectively. If you have large numbers of clients, for example, billing may be an opportune function for outsourcing.

Rather than setting up your own, you can find group healthcare schemes that not only are less expensive but which save administrative time; often they’re available through a chamber of commerce or trade association. Computing may be an area where large cost-savings can be achieved without loss of quality. It is possible to buy-in human resources skills, rather than recruiting a full-timer.

Less obvious forms of outsourcing include the use of an online newsletter firm to prepare your Web newsletter. They can take the sweat out of the job and reduce the cost while you retain design and editorial control (examples of such firms are and

Several of the ‘normal’ business practices may be purchased at more economical rates. use the services of your Chamber of Commerce. You are likely to find that the membership subscription is worth it simply for the group buying that it is able to do, passing on the benefits to you―let alone all the other networking and professional benefits offered by the Chamber.

Put Off Taking Premises

Of course, it’s nice to have fine premises at the best address, but unless you’re in a business like retailing, where location may be part of what makes or breaks the enterprise, you should not be tempted to take on premises out of your league. Your startup may be one that you can set up at home, or you can share workspace with others. There may be a disaffected building available where short-term or low-cost rental is possible while you’re finding your feet.

You can sub-let from someone with surplus space or take a larger space at an attractive rent with another business, which in turn may make shared services such as reception, telecoms, insurance, cleaning into cost-reducers.

Having no fixed workspace may be even better if your trade is plied on the Internet. Try a free wi-fi service cafĂ© if there’s one near you that has an owner happy to have you, but make sure you buy plenty of coffee and Danish pastries!

Low or No-cost Bodies

Above all, your business will depend upon the quality of the people that work in it. That doesn’t necessarily mean that you have to have them on the payroll. I know an electricity supply company that has grown to sales of over $150m using commission-only sales brokers. Not only did the brokers earn commission, but they also received “stock-option equivalents” so they were treated as well as the in-house staff, who themselves received stock-options, even at junior level. Once the business was well established, the external sales people were backed up by a handful of in-house key account managers and customer retention teams.

At the inception of the company, you’re unlikely to recruit a Board, but you can set up an advisory board of good contacts whose advice and support you value. If you chose wisely, such a group will enjoy working with you and having the occasional meeting, perhaps over a meal. You may also be able to establish a support group of peers, such as other entrepreneurs, with whom you can share experience to mutual advantage.

Collaboration is another effective means of minimizing your cash outlay. Working with other entrepreneurs, you may be able to find ways of taking on one specialist between you. This might be a bookkeeper, say, or a Webmaster.

Students can be an excellent source of motivated contract workers. You may have a business school near you and its students, particularly graduate students, may be highly motivated to work on real-life projects. You don’t have to exploit these young people; you’ll probably be able to strike a mutually beneficial bargain, and they may prove to be excellent recruits later on. You’ll have an opportunity to gauge their worth in a working situation.

Above all, give careful consideration to the idea of deferred or part-deferred remuneration. You may well find that if you offer stock options, perhaps through an ESOP, key people will be more than happy to work for lower salaries. In any event, sharing the perks however you do it, will be a motivator and especially where circumstance do not permit you to offer top pay rates. In addition, the motivational element is worth it.

Public Money―Don’t Count On It, But Grab What You Can

If a business cannot be sustained without grant or cheap money from Government sources, then it’s unlikely to be viable in the longer term, with the possible exception of businesses in the social enterprise field.

However, if there are government soft loans, loan guarantees, or other incentives to be had, go for them. In many parts of the world, not just in the US, there are special breaks for underprivileged or disadvantaged groups in society.

There may be tax breaks for locating in a particular place, or for innovation and subsidies for export promotion or other commercial actions beyond the access of a small enterprise.

New Money Sources Are Worth Checking Out

I have specifically avoided talking about the traditional sources of seed money, such as your savings or willing friends and family. Nor have I talked about personal or bank loans, because all of these are obvious sources of funding. However, the Internet has enabled a new source that you might want to consider: P2P, or Person-to-Person loans. In the US, there’s Prosper (, where you can list the loan you seek and private lenders can choose to make one or not. Rates depend on how the borrower is rated. Lower rates can be achieved by going through affiliation groups. In the UK (and soon the in US), there’s Zopa ( but for the moment lenders here, cannot see details of the loan being sought. There are many individuals seeking to pay off credit-card debt or make car purchases, but there are business loans being requested, too. Of course, you’d have to check out rates in your own case, but there are examples of P2P rates being less than half those asked by traditional finance companies.

To help facilitate this process is Circle Lending (, a Massachusetts-based specialty loan administration company that manages person-to-person loans and mortgages. They provide everything customers need to formalize and repay private loans. Given that the majority of private financing for startups comes from family and friends, this management service probably has a big future. Default rates seem to be lower than average. Zopa says theirs are 0.05% and Circle Lending claims <5% vs. an average of 14% for all interpersonal loans.

Debt Rather Than Equity

When you do have no other solution but to raise capital, make a careful consideration of going for debt, rather than equity financing. Debt may look expensive, but you are not going to have the same pressure that equity would produce. If someone is going to inject money into your business without any charge in the short term, it does mean that will want to cash-out in the future, maybe not at a time or in a way to your liking. Equity investors, be they family and friends or a financial institution, are going to look to when and how they can get a return on their investment. This may result in forcing you to make decisions in their interests, rather than yours. On the other hand, those who provide debt finance have the assurance that their money is going to give them income right away through the interest you’ll pay.

There are a number of instruments that may be possible, including convertible debt―in other words debt that is convertible into equity at a given future date. Such debt may attract a lower rate of interest. Of course debt finance will require collateral. In a standard hire-purchase arrangement it is generally the goods purchased that provide it―plus of course your credit-worthiness. However in a business situation you may be able to find financiers who will take a debenture on the business itself, or at least its realisable assets―rather on your home. I had such an arrangement with a bank at the beginning of a business of mine.

If you have a major purchase for which cash is short, then you may well find that you can require the vendor to arrange finance as part of the offer. After all, this is what plane manufacturers are very frequently obliged to do by airlines.

Three Cash-Raising Ways To Avoid―If Possible

There are many who may encourage you to use credit cards to finance cash flow. I personally don’t like the idea because interest rates on cards are so high. It can be a slippery slope: you may be tempted to say, “Oh, I’ll bung it on the card and catch up later, when…” But “when” may never come and you’ll be racking up interest on interest. If you believe there’s revenue coming to cover the debt in that month, then fine. Otherwise, steer clear and keep the card for real emergencies.

Another option that’s often tempting is invoice discounting and factoring. You get bills paid immediately but at a cost, and you’re likely to be required to enter a 12-or-more-month contract. You lose the advantageous direct contact with the customer because the debt is to the factoring company, not you, and they only want the money, not the relationship.

My last warning is not to wait until the last minute to seek a loan from the bank. It may be too late. Arrange a loan offer or line of credit long before you think you may need to call on it. Better to negotiate from strength, i.e., when you don’t need the money, than when you’re desperate.

May your financial seeds bloom!

    Note: Bootstrapping alludes to a German legend about Baron Munchausen who was able to lift himself out of a swamp by pulling himself up by his own hair. In later versions of the story, he was using his own boot straps to pull himself out of the sea. This gave rise to the term “bootstrapping”, and in finance it means starting a business with no, or almost no, money from outside investors. If you want to read more, try reading Bootstrapping Your Business by Greg Gianforte.


This Entrepreneurship article was written by William Keyser on 8/24/2006

William Keyser, veteran entrepreneur, is Managing Director of WorkSavvy! Business Startup. He counsels would-be and early-stage entrepreneurs. The Website is packed full of free ideas, information, and tools for the budding businessperson, who wants to start sooner, grow stronger and last longer.