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Are you a bootstrapping entrepreneur? Learn about how to raise the cash to take your online business to the pinnacle of success




This section is dedicated to YOU– the bootstrapping entrepreneur who is trying to create something big with something small, or nothing at all. The discussion involved here is slightly off beat from the rest of the website related topics on this website. However as a serial entrepreneur and a strong business minded individual, I felt as if this section was necessary as funding (finances) is an issue most, if not all, entrepreneurs encounter early in their journey to entrepreneurial success.

Entrepreneurs by nature are strong willed, dedicated, motivated and determined individuals. With the entrepreneurial attitude and strong determination to succeed comes a characteristic of self reliance. Often, entrepreneurs have a very difficult time “trusting” or relying on someone else other than themselves. As if everything has to be done by them right here and right now.

I admire the determination – however an entrepreneur has to get out of this mindset at some point and be able to delegate and leverage the help of others. I am not saying get rid of your self reliance attitude. No! In fact it is great that you are self reliant, and you should be. But also keep your options open to help and use the resources you have effectively. Remember, you cannot clone yourself.



Bootstrapping defined

Entrepreneurs like you will most likely want to build your business all on your own, without having to ask someone else for funds or to get into debt. Whether or not you have your own funds to begin with, there is something to be said for using other people’s money to build your empire. How would it feel to truly build an empire with no money spent from your own pocket? In Real Estate we call this OPM – using Other People’s Money. In pure entrepreneurship, I call this credit cards, friends and family, vendor and customer financing, etc.

The practice of gathering all the funds you can from your personal resources is commonly called “Bootstrapping”. Some of the common resources for a Bootstrapping entrepreneur are family & friends, personal debt/credit cards, savings accounts, investment and retirement funds, refinancing and home equity line of credit.



Good Ol’ friends and family

Friends and family are usually the first resource entrepreneurs resort to in time of funding need. The key is to communicate your intentions clearly and emphasize that you are not looking for a donation. You are looking for a bona fide loan and that you will be making repayments with interest as agreed upon. Be in command of the entire process and show your dignity and pride. It’s not them that are doing you a favor, it is you who is doing them one!

Their funds are no good sitting in a CD that pays back 3% annually anyway. Be very careful when discussing actual terms with your friends and family as even a little mistake can ruin your relationship with them for the long haul.



Credit Cards

Credit cards are a quick source of capital providing you have them. Most everyone has a credit card, unless your credit history is just horrible. Credit lines are often quite abundant (a relative term of course) and convenient to access. Many startups also apply for new small business credit cards for accounting purposes and to further establish the business as a separate entity.  It is important to stay on top of your credit card debt and repayments as while convenient, it can be the most dangerous source of startup funding.  

Your credit card history is tied to your FICO score, which in the USA runs your financial life. You want to make sure you keep your FICO score in good standings by complying with your credit card payments. I am not saying not to use credit cards, but just pay very close attention to your credit card related activities. Before you use your credit card, look around for the best interest rate you can get. Most often you can call the company and talk them into lowering your rate and increasing your credit line.

Whatever you do make sure you fully understand the terms and conditions, the credit card company’s policy, payment schedule, minimum payments due and late fee structure. You cannot stay on top of something you do not understand so make sure you get a good grip on these aspects.



Your personal savings account

Your personal savings are a reliable and quick resource to tap into for your business startup. Your savings are exactly that, Savings; and you can afford to loose them on an entrepreneurial venture that is worthwhile. While this is the ideal solution, unfortunately not everyone has the propensity to save on a regular basis and thus build a small nest egg that they can tap when needed. Whether or not you ever explore your entrepreneurial side, always always save a portion of your pay from your employment in your savings account.

Even if you don’t have any savings currently, let’s say you are contemplating starting your own business; start saving from this very moment as you research and plan out your business. If you save consistently chances are you will have a good amount to work with by the time you are ready to get rockin’ and rollin’.



Personal Investments & Retirement funds

You have some flexibility when you have some money saved up in your personal investment account. You can borrow against that money on margin, sell of your losers now to get the tax write off and use the proceeds for your business or simply stop contributing to your investment plan in the mean time while you save those funds instead for your business venture.

When you put your investment securities on margin, you are really borrowing against them. The borrowing is what brokers often refer to as “Margin”, which is typically 50% of your account value. Be very careful when investing on margin as margins are based on the value of securities that often fluctuate. When your $20,000 portfolio declines to $15,000, you can no longer borrow $10,000 but can only borrow $7,500. This means that if you have a $10,000 margin out and your portfolio declines in value due to market volatility, you will have to pump in $2,500 into your portfolio to satisfy the 50% margin threshold. This is referred to as a “call” on your margin.

Alternatively, if you have securities that have declined in value, you may decide to sell them and claim the current losses as tax deductions. This will provide you with the liquid funds needed to start your business. I personally recommend stopping your monthly investments and instead saving up that cash for your business venture. If you need more funds later, you can consider one of the other two options discussed in this section.

One thing to be very careful about however is the use of investment funds specifically in your retirement account such as an IRA or a 401(k). The Government has strict rules and regulations in place that clearly define what you can or cannot do with the funds in these accounts. The reason is that the Government wants everyone to save for retirement and thus has made it a hassle for us to withdraw from these accounts prior to retirement. Taking money out of these funds can also jeopardize your retirement if your business fails.

That being said, there are exceptions that legally allow you to invest retirement funds in a business venture without having to pay any taxes or penalties. There are some savvy investment advisors and companies out there that have figured out a way to do this so search for them if this is the option you are contemplating for funding your business.

Please consult your personal investment advisor and CPA prior to making any move related to this discussion. Personal Investments is a technical profession that can become very complicated very fast. Make sure you understand all the implications of every move you make.



Refinance your existing home

Refinancing is a very good way to generate instant cash for your business venture. If you have some equity build in your home and the real estate market is relatively stable to relatively good, you may refinance your existing home to pull out some of that built in equity for your business. Let’s say your home is valued at $150,000 and you only owe $120,000 on it, you can refinance it for a value up to $150,000 providing you meet the lender’s other application requirements. In a strong real estate market with rising property values, your home may be worth more than 150,000, in which case you can refinance for a higher amount. What will happen is that the lender will “pay-off” the existing mortgage (120,000) and give you the excess amount you refinanced (150,000-120,000 = 30,000)

I like the refinancing option because chances are that the interest you will pay on the new mortgage will be lower than what credit cards or other investors charge. Moreover, the interest you pay is 100% deductible for tax purposes. This option clearly beats both the investor and credit card financing options.



Line of Equity

A revolving line of credit (LOE) is based on the same concept as refinancing in the sense that it allows you to utilize the equity built in your home to fund your business. With a revolving line of credit, a lender such as the bank will allow you to take out a loan on an as needed basis based on the equity you have in your home at the time you get approved for the credit line.

It works like this: say today you walk into a bank and apply for a LOE and let’s take the same example as above in terms of your home value. The bank will approve a 30,000 LOE assuming your home is appraised at 150,000 and you owe 120,000 on it. Banks usually give you a LOE card which works like a debit or credit card as well as a checkbook that you can use to cut out checks. Instead of taking the amount from your checking account, these checks will take the money from your available LOE. Interest rates are usually variable (they change with the market) with a LOE and you only pay for what you use. Interest rates on LOE funds are also fully tax deductible.



Advantages of Bootstrapping

Among the many advantages of Bootstrapping is the freedom to make decisions regarding your funds. When you are using your own resources to fund your business, you don’t answer to anyone else. You have complete control of your business, both financially and operationally. To most entrepreneurs this particular advantage is priceless.

And when your business succeeds in the future, all of the profits will be yours and you will have no one to split them with. This is one of the biggest advantages in my opinions as most venture capitalists and angel investors are looking for your arm and neck in exchange for some money that they front you with to start your business. I personally refuse to hand over a big portion of my personal success to someone just like that.



Disadvantages of Bootstrapping

As you would expect the disadvantages of Bootstrapping are exactly the opposite of its advantages. When you borrow funds to start your business, chances are you will have to provide your investor with regular updates and take their decisions into consideration in running your business. That is why it is very important to ensure that other than the availability of funds and the willingness to invest by the investor in your venture that your personalities match as well at the onset.

Personality conflicts can destroy your entrepreneurial dreams when you are relying on someone else’s funds. In addition, depending on how you structure your deal with your investor, you may or may not end up being personally liable for the funds lost in the event that your business does not succeed.

The cost of borrowing funds is not cheap either. Most investors demand a very high return on investment as they deem these types of investments very risky. Investors will often demand this return in the form of high interest rates and a significant portion of your profits or proceeds from sale if you were to sell the business down the line. Often there are also limitations in how you can use your funds. Make sure you and your investor are clear on how you will be using the funds at the onset of the agreement and try to err of the flexible side as much as possible.



Conclusion . . .

Whether you decide to delve into financing your business on your own or with the help of other resources, you will have to decide what the best use of your funds is. Be clear on your expectations of how much money your business will take to start up and build. Not budgeting carefully can be dangerous as you will find yourself out of cash pretty quickly. Make sure you are aware of all the risks and returns of your investment. As yourself if the risks are worth the returns?

I recommend drafting a comprehensive business plan for your business so that you are forced to answer important questions such as your competition, exit strategy, funding resources etc. Many Entrepreneurs come to realize many things during the business plan writing process. I would do this before I go any further with your plans to start and establish your business. Once you are comfortable with your business plan, you can go ahead bootstrapping your way to success.

The message I want to convey in this discussion is that tough it can be difficult, Bootstrapping your company to success can be the most rewarding route to go. I do not necessarily want to say less stressful, though it is in many ways, but I want to reiterate that you have no one else to answer to but yourself. These are your own funds that you’ve worked hard to accumulate and I am sure you will work twice as hard in making your venture successful. You have a wide array of options if this is the route you choose. However, do spend the time necessary to clearly evaluate the risks and rewards that are going to be involved in your journey to entrepreneurship

So good luck to you bootstrapping entrepreneur!








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