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Creative Capital
Home > Financing > Types of Financing > Creative Capital Bootstrap Financing Everyone has heard the story of the business started with $200 of operating capital and, in just a few years, expanded to a multi-million dollar enterprise. While this is often an exaggeration, similar growth can be and is attained by many small business entrepreneurs. Bootstrap financing is simply leveraging personal resources including debt, and combining it with quick growth and the reinvestment of net profits from the venture. When capital is not obtainable through traditional commercial means, this serves as a substitute for having the optimum amount of financing for starting or expanding a small business. The entrepreneur seeking capital can be innovative in using bootstrap financing and can typically create funding from as little as a few hundred dollars up to $25,000. Typical Sources of Bootstrap Financing
Whether it is a home-equity line of credit, a second mortgage, or the refinancing of an original mortgage, you can usually get as much as 80 percent of the equity in a house. The loan is easy to qualify for, with rates comparable to and occasionally lower than small-business loans. Obviously, the disadvantage is you could lose a home if you are unable to repay the loan. Small business owners can get personal, unsecured loans from credit unions. If you have been a member of such an institution for some time and can qualify, it's worth asking. If you have such a policy you can borrow against it and great interest rates are possible depending on the fine print. Cash-value life insurance also is excellent collateral for institutional loans. Your local investment broker can lend you money based on the balance in your security account. Securities can be turned into cash in the time it takes to make a phone call to Wall Street. Advance payments for year-long service contracts or shipping products, special pre-release discounts or incentives for a host of products and services are examples of customer financing. Asking a supplier to give 60 to 90 day terms, particularly for inventory or goods that you manufacture or resell within that time frame, is the equivalent of a short-term loan. This works best if you can show orders to suppliers and you should be prepared to pay for the use of their money through an interest rate or more business. Two local entrepreneurial non-profits organizations, the Portsmouth Community Development Group and Norfolk State University's program MEDAL offer this type of financing. These loans are usually described as unbankable deals and generally do not exceed $25,000. If you can pay the immediate income tax on funds withdrawn, and afford the 10 percent penalty for those under 59 1/2, you can cash out an IRA, or take money out of a Keogh account. While this is a heavy price, there are no loan forms to fill out. Most other bootstrap techniques should be considered prior to using this method. If you have not quit your job, you can sometimes borrow from a 401(K) plan. If a working spouse has a plan try borrowing from it. Be certain to read the fine print to see how the plans rules are set up to allow these loans. Obtaining plastic money prior to starting a business is perhaps the easiest capital to raise. However, cash advance interest rates usually are between 16 percent and 23 percent. Credit cards are best used as a revolving line of credit, and to get over short-term (less than four months) financial hurdles during the first two years of business. Beware: You can develop serious cash flow problems just paying the interest if credit card debt is not used judiciously and strategically. This is a lender of last resort and potentially has rates that are not affordable and sometimes just this side of usury. Negotiate the rate! |