One of the biggest challenges with African entrepreneurs is access to capital and funding. So a lot of the time, entrepreneurs resort to bootstrap financing by actively thinking of creative ways to raise money internally, without dancing to the tune of the pressure outside. However, most business owners are not aware of the many sources of bootstrap financing.
See Also: Bootstrapping your business to success.
What Is Bootstrap Financing?
Bootstrapping is the process where an entrepreneur uses existing resources such as their personal equipment, office space, or personal savings to grow their business. It’s a way of stretching your resources to their maximum utilization, reducing costs.
When an entrepreneur starts a business using different sources of bootstrap financing, they grow and expand their business with personal finances and revenue from the company. There are traditional ways to fund a business such as funding from friends and family, angel investors, early-stage investment firms, and venture capital firms. But, we are going to focus on bootstrapping and the different sources of bootstrap financing.
One valuable lesson I’ve learned as an entrepreneur is that bootstrap financing is indeed a worthwhile experience because, it builds character and mental toughness, which is a must-have for every entrepreneur. Bootstrapping gives you room to think creatively and makes you squeeze out the juice from every fiber of your business.
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Sources Of Bootstrap Financing
Going forward, we will comb through the 10 different sources of bootstrap financing to grow your brand.
1.) Personal Investment or Savings
An entrepreneur’s belief and faith in his business is measured by how much of his personal savings and capital is in the business. You should have some money saved up for the business you intend to start.
Some entrepreneurs go as far as investing either a part, or their entire wealth and time in the growth of their companies. This is more or less the first thing investors look out for, before committing their funds into your business.
Juice out whatever cash resources you have access to, from your cash accounts, to credit cards, to home equity loans, to selling other investments. The less cash you raise from outsiders, the more your stake in the business, especially during the “infancy” stage of your business when valuations will be at their lowest point.
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As an entrepreneur, one great source of bootstrap financing is through a partnership or finding a co-founder with money. Getting yourself a co-founder can be tasking, especially when it wasn’t in plan from the start. However, partners and co-founders can be a great way to ease yourself off the financial burden of your business.
Co-founders can be a great source of cash investment or sweat equity from people who believe in your brand to the extent of working without a cash salary. You know what they say about a problem shared; half-solved. So, sharing the financial burden of your company with co-founders and partners will ease the financial stress.
Kill that self-made philosophy; don’t think you need to build your startup all by yourself. Find others with similar vision and dreams, with aligned values to complement your skill-sets and build the empire you desire.
See Also: Sources of funding for entrepreneurs to grow their businesses.
3.) Friends And Family
Charity begins at home, they always say. Sometimes it is easiest to raise capital from the people that know you best and can vouch for your personal drive and skill set, much better than an investor, who is a complete stranger.
However, you have to be clear and open with them upfront. They should know that they could lose all of their investment in a risky venture and should not invest more than they feel comfortable “gambling” with.
Customers are another source of bootstrap financing, and there are several different ways to spin the wheels of these valuable assets. One way to use your customers to obtain financing is by having them write you a letter of credit; more or less like a local purchase order (LPO).
For instance, suppose you’re starting a business, manufacturing laptop power banks or inverters, and a large corporation places an order with your firm for a steady supply of these laptop power banks and inverters. If you obtain the materials for your product from your supplier in China, you can obtain a letter of credit from your customer when the order is placed.
Then, the material for the power bank and inverter is purchased using the letter of credit as security. In this case, you don’t have to pay a penny to buy those materials.
See Also: Manufacturing business ideas to start now for aspiring entrepreneurs.
You can get vendors to trade all or a portion of their services for equity. Trading of equity in your business, as an alternative to paying cash, often sounds like a great idea to a cash-starved startup. But, you have to realise that giving up equity in your business is often a very big decision, and can come at a long term price, both financially and operationally.
Before going into such deals, you have to understand the structure of these deals. Deals like this boil down to the security, voting rights, and valuation of the deal. For the security, shoot for a convertible note or common stock deals. For voting rights, it should be capped at their pro-rata ownership in the company, and typically should not require any seats on your board – just so you can run your business as you deem fit.
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6.) Crowdfunding Sites
Some startups are limited in the ways they can raise funds. Not everyone has access to wealthy family members and friends, or even angel investors and VCs. So, a number of startups have turned to crowdfunding as a viable means of raising capital for their businesses.
The crowdfunding system of operation is through the use of small amounts of capital from a large number of individuals to finance a new business venture or startup. Crowdfunding makes use of easy access to vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together.
Furthermore, apart from raising funds, crowdfunding ventures have also been proven to be a valuable way to gather public opinion and create publicity for a startup or its product. Crowdfunding platforms like kickstarter, Gofundme, Indiegogo, etc. can be of help.
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7.) Small Business Grants
Grants are also a great way to go when using the bootstrap financing route. Free grants are available, especially if your startup is helping to solve a social problem (healthcare, education).
If you’re interested in starting a nonprofit, or in creating a product that stems out of some sort of academic research, grants might be the best option for you.
8.) Reduce Operational Expenses (OPEX)
As an entrepreneur, it is good to know that reducing your expenditure to the barest minimum cuts down on the amount of cash required to fund your business.
You can use the following techniques to reduce startup expenses:
- Use bartering to exchange goods and services.
- Run the business from home or share premises to reduce rental payments.
- For the first few years, founders should view their time as an investment and keep their salary to a minimum.
- Employ relatives and friends at non-market rate salaries.
- Engage students in projects to provide knowledge at a low cost.
- Hire staff part-time instead of employing them permanently.
- Share employees with other businesses
See Also: How to reduce your business expenses and make money for your business.
9.) Equity Free Funding Programs
There are a couple of equity-free funding programs now. You can find them if you look for them. The programs are structured like business plan competitions, incubators programs, and accelerators programs.
Accelerators are usually designed for companies that are farther along in their journey. These programs are available and we publish them on the opportunity section of Entrepreneurs.ng.
10.) Get A Part-Time Job Or Freelance
This is more or less contradicting terms. How can I get a job when I’m working on my own business. It sounds crazy. Yes, I know. However, the lowest hanging fruit in bootstrap financing your business might be getting a job or freelancing.
Clearly, there are lots of freelancing platforms that make it easy to find short term contract work. Platforms like Upwork and Freelancer lets you create a profile and start taking on projects as soon as you are ready. In addition, freelancing can be a great way to build skills and capacity that you might find useful and handy when building your business.
See Also: 100 Profitable business ideas to start now for aspiring entrepreneurs and investors.
I want you to know that sourcing capital for your startup is not easy, especially when your product hasn’t hit the market and you don’t have a verifiable ‘proof-of-concept’ that the traditional venture investors look out for.
Therefore, the only way to get your business from a piece of paper idea to a bankable venture business is to bootstrap your efforts through different sources of bootstrap financing.
There are a number of advantages and benefits to bootstrapping your business.
- You won’t have to pay the high interest on borrowed money.
- Coming from a stronger position (with less debt on hand), you look more desirable to external lenders and investors. Especially, when the time does come to raise money through these routes.
- Your business will be worth more because less money has been borrowed. Therefore, no equity positions had to be relinquished.
- You can be creative in finding ways to raise profits, without having to look for external sources.
How did you finance your business? Or how do you hope to finance your business? Please share your thoughts and experience in the comments. Also, if you found this content useful, please click the share button and share it with your audience.
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