Many startups have turned to bootstrapping for financing in a tight financing climate, but self-funding isn’t only for fledgling firms. When the National Small Business Association surveyed its members (which tend to be older, established companies) this past summer, 43 percent had tapped their business’ earnings to cover financing needs in the past year. Among the respondents, 75 percent said they’d been affected by the credit crunch.
One big advantage of bootstrapping is that it lets you hold onto all of the ownership in your firm, as opposed to selling shares to equity investors. At the same time, the onus is on you to come up with the cash the business needs, and that can take a lot of quick thinking.
Here are some tips from other entrepreneurs on the best bootstrapping ways to raise cash for your business.
Keep Your Day Job
This can be an ideal way for start-ups to keep cash flowing during the crucial early years of a business. Kristen Carney, co-founder of Cubit, an Austin, Texas-based provider of customized maps offering demographic data, and her co-founder, Anthony Morales, have taken turns holding a traditional job outside the business to cover living expenses while the other works full-time on Cubit.
Morales worked for about a year as an interaction designer for the Texas Department of Public Safety while Carney devoted herself to the business. Now she works as a project manager for another company while he runs the business. “We lived off our savings for a while, but the business wasn’t making enough to support both of us,” explains Carney. Of course, it helps in arrangements like this if there’s a very high level of trust between the partners. In this case, Carney and Morales live together as a couple.
Use Profits to Fund Growth
This is the strategy that we are using at the $200KFreelancer, a site I co-founded with fellow journalist Elizabeth MacBride to help freelancers earn a living. We recently began to monetize the site, as a content provider, and putting the money we earn back into the business to pay for services we need.
I learned this approach can go a long way. Ask Andrew Geant, who co-founded the tutoring marketplace WyZant with Mike Weishuhn in 2005. “We had just graduated from college,” Geant says. “We had no money of our own to put into the business.” Weishuhn worked on the technology from his desk at his day job as a software developer from 6 p.m. to midnight, with his employer’s blessing, while Geant provided tutoring services for 20 to 30 hours a week to generate revenue. Having some cash in its coffers gave the site the runway it needed to pick up traction. The Chicago business now brings in revenues in the “tens of millions” and has 45 employees, as well as 60,000 tutors working as independent contractors, according to Geant.
Get an Instant Loan
Tighter lending standards have made it harder to rely on credit cards than it was before the financial crisis. However, if you have good credit, you may still be able to qualify for attractive deals.
In a survey released this past summer, the National Small Business Association found that 37 percent of small business owners had used credit card financing in the past 12 months, making it the second-largest source of financing, after a revolving line of credit from a bank (used by 43 percent). Geant and Weishuhn borrowed $10,000 on personal credit cards as they grew their business. “We were able to find a lot of zero-interest deals and swap our balances around,” said Geant. Just remember that even if you take out credit cards in the name of your business, you will most likely be personally liable for the debts.
Turn to Customers and Other Fans
You’ve probably heard that crowdfunding sites like Kickstarter, Indiegogo and RocketHub currently let you solicit donations from customers, fans, and others who want to support your efforts. To raise money like this, you need to be able to build a strong fundraising campaign and promote it through social media. Starting in January, federal law will let you raise investment capital through crowdfunding, too. While the jury is still out on exactly how this new route to financing will work, it’ll be worth investigating once small companies start trying it.
Elaine Pofeldt is an independent journalist and editorial consultant who specializes in small business, entrepreneurship and careers. She is co-founder of $200KFreelancer, a community for freelance professionals, and Endhousearrest.com, for homeowners looking to sell.
Have tight lending conditions forced you to get creative with your funding? Tell us about it in the comments.