Financing a business is one of the toughest things any entrepreneur will ever have to do - and many never find the funding they need. In these challenging economic times, banks have tightened up on lending and funding is more difficult to secure than ever. It's a phenomenon that impacts business owners throughout the world, and not just in South Africa.
The reality is that most new business owners may need to look to sources other than banks and financiers to get their ventures off the ground because lending policies are not likely to loosen up for some time. In fact, research indicates that more than 99% of entrepreneurs who seek funding have their proposals rejected. But that does not mean that they give up. Most new businesses are started without any outside help. That's where "bootstrapping" comes in.
This BizConnect guide will help you to understand the concept of bootstrapping and how you can use it to get your new venture up and running:
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
What is bootstrapping?
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The term is taken from the German legend of Baron Münchhausen who supposedly hauled himself out of the sea by pulling on his own bootstraps. Most new businesses are bootstrapped, with some going on to obtain second round funding once they have managed to get the business up and running and the business model is proved to be sustainable and profitable.
To bootstrap a business, means to rely on your own saving, early cash flow and thriftiness. Personal savings play a huge role in almost all start-ups. Saving money will help you get started. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue.
Boostrappers may also try to line up customers and suppliers early while taking little or no capital for themselves. Anything extra is repeatedly ploughed back into the business. Years of steady revenue and profits can help company founders save up enough to invest in rapid growth once they have built a loyal customer following.
One way to start without lots of capital is to offer prospective clients a great rate in order to get the cash flow going. Positive cash flow allows you to pay overheads and employees.
Early suppliers may also be a source of bootstrap financing. Ask suppliers to extend payment terms. Share your business plan with them and help them to understand how they will benefit when your business grows.
Is your business suited to bootstrapping?
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The best type of business to bootstrap is a service business. Some examples of service businesses include the hospitality sector, public relations consulting, financial advice, appliance repair, computer support, business services, real estate, legal services and education. In all of these cases, people are being provided with a service, not a product.
Starting a service business is less costly than starting a business which makes and sells products. For example, a computer technician can easily work out of a personal vehicle, travelling to clients to provide support services. Conversely, a large amount of capital is needed to equip a restaurant business or a printing shop, for example.
The bootstrapping business plan
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Because you are not seeking investors for a bootstrapped business does not mean that you don't need a business plan. On the contrary, a bootstrapped business plan is critical and should focus on the operational side of the business.
- Start by defining your strategy. Focus on what you do really well and set out how you are going to leverage those abilities. Also remember that bootstrappers have nothing but their customers to focus on.
- Break down your sales forecast into units and components so that you can measure your progress later and see where you were right or wrong.
- Create an expense budget so that you can start to manage cash.
- Once you have a sales forecast and an expense budget, you're on the way to having a cash plan. You have to add in buying assets and paying liabilities.
- Break your goals and objectives down into specific tasks, with planned schedules. Call them milestones, even if that just means it's you managing your tasks.
- Establish a regular time, like a monthly meeting, to review your plan results.
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Bootstrappers focus their energy on making money and being smart with it. Along the way they tend to learn more about money management and finance, than those who start out with someone else's cash. There are several ways in which you can successfully bootstrap.
Cut your overhead costs down to the bare essentials. Every cent you unnecessarily spend cuts into your ability to succeed.
Use the cash you have access to in the form of credit cards, overdrafts, second mortgages and personal savings.
2. Business premises
Save money by working from home. If that's not possible, rent short-term office space rather then entering into expensive lease agreements. You may also find someone to your share office space which also helps to contain costs.
Use the equipment you have, or rent office equipment rather than buying new. The same applies to any specialised equipment you may need, such as industrial cleaning machines if you plan to start a corporate cleaning service.
In these tough times it's good to know that there are many free marketing resources out there.
a) Social media
Social media marketing is the process of gaining website traffic or attention through social media sites. It centres on efforts to create content that attracts attention and encourages readers to share it with their social networks. Messages spread from user to user and are driven by word-of-mouth. Social media is easily accessible to anyone with internet access and it's a relatively inexpensive platform for organisations to implement marketing campaigns. Reserve your company name on each platform as soon as possible so that others can't use it.
- Facebook offers exceptional, low cost marketing opportunities for small business and is a very powerful free platform on which to build a presence. Find out more at www.facebook.com/business
- Twitter continues to grow and is a great marketing platform for some small businesses. For ideas on how to leverage Twitter for your business, go to https://business.twitter.com
- LinkedIn is a business oriented social network for professionals and it has more than 147 million members at last count. Similar to the way you might start exploring Facebook and Twitter, you should look around on www.linkedin.com to see how your competitors are using the service. You can also look up your customers and connect with them.
- YouTube can provide excellent social media marketing opportunities. Simple videos can help your marketing efforts. For example, you can show off exciting new products to prospective customers or demonstrate that new software and provide product data, statistics or any other information you choose. Find out more at www.youtube.com
b) Email marketing
Used effectively, email marketing can be one of the most valuable of all online marketing tactics. It is really cost-effective, can be highly targeted and customised, and it's measurable. It also takes advantage of the consumer's most prolific touch point with the Internet, their inbox.
Networking helps you become more interconnected within your industry, opens the door for new partnerships and creates visibility for you and your company. By attending business forums and industry events, you gain new perspectives, new ideas, new wisdom and, if you're lucky, new mentors. You may also attract new clients.
d) Public relations
PR is cost-effective and it works. Sending out a press release is just one example of free PR. There are many reasons for sending out a release: introducing a new product or service, winning an award, closing a big deal and more. Public speaking and radio interviews are also free ways to gain publicity for your business. Do it regularly and you will keep your name in front of your customers' and prospects' eyes and be top of mind when it comes to awareness.