I am a Business instructor at Isothermal Community College in Spindale. Over the last several years our local economy has changed from large manufacturing to small business. We have seen many plant closings and a corresponding loss of jobs. As a result of our changing economic reality our focus at Isothermal, in the business area, has begun to shift from a corporate emphasis to small business and entrepreneurship.
Over the last couple of years I have had the opportunity to work with aspiring entrepreneurs through our student body and through NC REAL( a not-for-profit organization dedicated to helping rural high schools and post-secondary institutions, and community-based organizations create entrepreneurship programs which enable students to create their own small businesses and explore self-employment ). Funding is a concern of the majority of the students in our REAL classes. Most of our students believe that they need to raise money to start a business through bank financing, Venture capitalists, and other sources of external funding. While this is true for some businesses many other entrepreneurs either cannot obtain the necessary funding or would be better served, at least in the beginning stages of their venture, by bootstrapping. Bootstrapping or the avoidance of external financing is an often overlooked or discounted alternative to external funding for entrepreneurs.
There are many benefits to bootstrapping. The first benefit is obvious---there are no investors. Investors not only have a claim on any future profits but they may also have an impact on decision-making. While investor input can be valuable investors who do not share your vision or values may be a major distraction as well as a source of stress. Secondly, with bootstrapping there are no monthly loan payments. Business loans can be difficult to get and even more difficult to pay back. A simple breakeven analysis can shed light on the potential burden of the increased overhead brought on by too much debt. Often the cash obtained from financing is misdirected. One of my favorite quotes is from Stephen Covey, “The main thing is to keep the main thing the main thing.” Well in business the main thing is sales. It is easy to lose focus when starting a business and burn cash on expensive office furniture, an expensive storefront, or unnecessary equipment that have little or nothing to do with generating sales. Bootstrappers are more likely to focus on cash flow and short sales cycles which helps to avoid the sure death of any business—a cash shortfall. Thirdly, you also learn a great deal about your market by bootstrapping. Your product or service can be field tested and improved. Pricing can be refined. New opportunities can be found and explored. Your market experience can greatly reduce the risk involved in expanding or growing the business. Finally, bootstrapping focuses your attention on your business. Finding investors or obtaining loans can be very time-consuming. Instead, an entrepreneur could spend that time and energy improving their product or service and selling (keeping the main thing the main thing).
A popular segment of our REAL class is “Banker Night”. On “Banker Night” we have a couple of local bankers visit the class and field questions from our students. This is a valuable learning experience for our students because some of the fear of the unknown is eliminated as they ask questions of the bankers. The questions can address the actual concerns pertaining to a specific business plan or they can be hypothetical. The insight that is gained not only helps our students to better understanding the funding process it also helps them to recognize shortcomings in their plans. Additionally, as “Banker Night” unfolds the benefits (or necessity) of bootstrapping becomes more clear. The bankers point out that they want the entrepreneurs to succeed. They basically evaluate the risk involved in loaning money and try to determine the likelihood that the loan will be repaid. They also offer suggestions that will improve the likelihood that the loan will be approved. A key point the bankers always make is that it is easier to obtain funding if the entrepreneur has some experience in the business or has already started the business with some level of sales. Novices are considered very risky. If the applicant already has some sales or customers then the beginnings of a track record is established and risk is reduced. For example, one student started a business importing furniture and selling it on Craig’s List. Due to his low overhead his initial funding needs were met by the cash flow generated by his sales. As his sales grew his goal was to open a retail storefront location locally in order to expand his sales. Since he was able to show his banker that he was generating sales he was able to obtain the funding to open his store. To the banker this entrepreneur had established a track record and therefore represented lower level of risk than a novice entrepreneur with no experience in the furniture business.
Many other types of businesses can be established this way. Although service based businesses are easier to bootstrap think outside the box, get creative-- instead of opening a restaurant begin by starting a catering service. Instead of opening a retail storefront begin a retail operation on Ebay, Craigslist or Amazon or through your own website.
There are drawbacks to bootstrapping. It can be very slow to grow a business in this manner. A large infusion of cash can also give a business the resources it needs to reach the next level. Additionally, many businesses need a large amount of start-up capital. However, for many aspiring entrepreneurs bootstrapping is the only viable way to success.
Below I have added a link with some good tips for bootstrapping.
http://www.entrepreneur.com/magazine/entrepreneur/2009/may/201102.html