While I was off the grid over the Easter weekend, my Sunday column about self-financing and bootstrapping ran at the Tennessean:
The thought of having to put your life savings, your home, or your retirement accounts at risk to launch a new business can send a chill down the spine of even the most committed entrepreneur.
And for the accidental entrepreneurs who have to start a business to make it through the current recession, it can create an almost paralyzing fear.
But self-funding is a part of the financing equation for almost every new business.
The base of self-funding comes from the entrepreneur’s personal savings. When my partners and I started a health-care business in the 1980s, we had to rely on our savings to help us start the venture.
As the owners, we only received paychecks about half the time during the first two years. By having savings in place, we were able to maintain the lifestyle we had experienced before we launched the new venture.
Entrepreneurs come in all sorts of packages. Some new businesses need to be developed while the owner continues to work at another job.
If your business can be worked on during any time of day, find a day job that can pay the bills. Or, be prepared to take on an evening job, such as waiting tables or bartending, to help create a bridge until the new business brings in a steady income.
Of course, at some point the business will demand too much time to allow you to maintain two jobs. Hopefully, this will occur at a time when the new venture is able to pay you a regular salary.
Learn to pinch pennies
Banks generally do not lend money directly to startup businesses. However, you may be able to get a personal loan that you can use for the business. If you have enough equity in your home, you may be able to secure a second mortgage.
Another option is to put up property such as stocks that can serve as collateral to back a personal loan. Understand that such loans put your personal property at risk, if you default on the loan.
The most effective means you have to minimize the amount of cash you will need to put into a business is to find ways to bootstrap or shave dollars off your startup costs.
Bootstrapping can help reduce the time it takes to reach break-even in the business by reducing the overhead expenses you have to pay every month. That is why so many entrepreneurs start their businesses out of their kitchens, their garages or their basements.
Bootstrapping can also reduce operating costs, giving the owners more profit from each dollar of sales. The sooner you reach break-even and cover your basic expenses, the sooner you will have enough cash flow to pay yourself a salary and stop putting more of your own money into the business.