In the current business climate, the combination of limited credit availability, reduced cash flow and fewer financing sources makes personally funding your own business a more appealing option for many entrepreneurs. This strategy, a.k.a. bootstrapping, can help a business owner reach financial goals and provides a degree of independence in making operational decisions. It also makes it crucial to cut costs during periods of economic hardship. Here IMT looks at techniques for effective bootstrap financing and ways to trim budgets as the business landscape shifts.

Given the present obstacles to obtaining capital for a new company, starting and operating a business without relying on external capital and investments, or “bootstrapping,” may be the best option for some entrepreneurs. However, taking this approach requires careful planning and a consideration of the risks involved.

“Despite the dream of some entrepreneurs to meet a VC [venture capitalist] with deep pockets, the fact is that 99.9 percent of business owners will struggle alone, pulling themselves up by their bootstraps. And that’s not necessarily a bad thing. With a little luck and a lot of pluck, bootstrapping a business can be both financially and emotionally rewarding,” Entrepreneur.com explains.

Aside from financial concerns, part of what drives many entrepreneurs into funding their own businesses from scratch is the level of independence and freedom to develop their company along the lines they prefer.

“Now, entrepreneurs boast about funding their start-ups all by themselves without help, or hassles, from venture capitalists,” Forbes.com explains. “They say that bootstrapping gives them more control over their companies and that they aren’t pressured to repay investors quickly.”

Building a business at your own pace without the obligation to satisfy outside investors can be a major benefit, but before embarking on this strategy, a would-be bootstrapper must closely examine the risks. Money is likely to be tight, especially during early stages, and self-funded businesses must often run on very tight margins — or even at a loss — before they start to see any significant returns.

In terms of initial investment, “about 84 percent of start-up businesses are typically funded in the early phases using savings from company founders, along with support from family members, friends and credit-card and home-equity loans,” the Wall Street Journal reports.

When working with partners, it’s important to determine beforehand how much capital each member is willing to contribute and how much debt they are willing to assume. Establishing these ground rules early will make it easier to make financial decisions later on.

“Every business needs sales. But a bootstrapper has to be single-mindedly obsessed with sales. How else can you get the cash to keep the business afloat?” Inc.com says.

Focusing on sales from the beginning can be a useful way to generate cash. In fact, the business may be forced to rely on sales simply to meet basic operational requirements. Additionally, building a customer base, even a small one, can be valuable proof of your business’s future growth potential.

“Since it often takes weeks or months to collect money from sales, financing a business from only sales revenues is really an exercise in advance planning,” Entrepreneur.com explains. “The savvy entrepreneur should know not only how to pay for today’s expenses, but also how to pay for the next three to six months of overhead.”

Having customers pay up front through subscriptions, preferred contracts and relying on advance deposits or retainers can help alleviate immediate cash problems. But expanding a bootstrap business without support from external capital may require some inventiveness on the owner’s part.

“Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations and focusing on an aspect of the business that can generate revenue,” the New York Times advises.

Keeping costs low is another priority among most bootstrapped businesses. Without external support, finances can be precarious and recovering from unexpected losses may not be feasible. “That means no lavish spending on swanky offices, excessive travel and employee perks,” Entrepreneur.com says. “There is really no room for excess of any kind in a young business.”

American Express’s OPEN Forum for small businesses offers the following tips for reducing start-up operating costs and improving cash flow in a new business:

• Lease equipment. When company cash is tight, it may be more prudent to lease equipment rather than buy it so that the cost can be spread out over several years.
• Focus employees. Make sure your employees know all their duties and can be held accountable. This will improve productivity and help you monitor expenses.
• Plan schedules and shipments. Identify peak demand periods and schedule labor accordingly. Similarly, establish and stick to a shipment timeline to keep products moving efficiently.
• Manage inventory. Implementing a system for managing inventory, even a low-tech one, and tracking purchases and sales can help calculate costs.
• Rethink payments. Consider non-monetary methods for purchases, such as savings programs or barters, and try negotiating with vendors to obtain better prices.

The workspace itself can also be a major source of expenditure. Controlling facilities costs can mean a significant boost in cash availability.

“If you operate out of one location, but want to reduce overhead, consider sharing work spaces through ‘co-working’ arrangements,” a separate article from the Journal explains. “If you’re a small enough operation, or a solo entrepreneur, you might shave costs even more by moving to a home-based office.”

Reorganizing the workforce to reach optimal staffing levels is another important step in managing costs. If demand is relatively low, it may be more cost-effective to hire temporary staff on a seasonal or project-to-project basis. Depending on the company’s needs, freelancers may also be a better option than hiring full-time marketers, copywriters or customer service professionals.

For an entrepreneur who decides the risks are worth it, bootstrapping a business can be a highly rewarding endeavor. After cutting expenses and getting through the early days of slim margins and uncertainty, your new business may be ready to expand and thrive.

Earlier

Where to Go When Banks Say No

Surviving the Credit Crunch

Buy or Lease Equipment: How Do You Decide?

Small Biz Owners Revisiting Age-old Tradition: Bartering

How to Find Good Money

Resources

Bootstrapping Your Startup
by David Worrell
Entrepreneur.com, October 2002

Bootstrap Yourself!
by Sramana Mitra
Forbes.com, April 18, 2008

Start-Ups Chase Cash as Funds Trickle Down
by Conor Dougherty and Pui-Wing Tam
The Wall Street Journal, April 1, 2010

Start with Nothing
by Emily Barker
Inc.com, Feb. 1, 2002

The New Rules of Angel Investing
by Kermit Pattison
The New York Times, Oct. 28, 2009

Cut Costs without Cutting Quality
by Dick Williams
American Express OPEN Forum, Feb. 24, 2009

Three Best Ways to Get Lean
by Sarah Needleman
The Wall Street Journal, March 28, 2010