Best Practices for Your Early Stage Venture by Emad Rahim
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Transcript of Best Practices for Your Early Stage Venture by Emad Rahim
Entrepreneurial financing might be one of the most difficult and intimidating aspects of business
ownership. While entrepreneurs are filled with innovative ideas and passion, they're often starving for the capital to jumpstart and grow their business. Instead of searching for venture capitalists and angels to invest in your business, or hoping you get invited onto the show 'Shark Tank' to pitch your idea, why not consider bootstrapping first? Bootstrapping means financing a new company without resorting to loans—that is, seeking the assistance of, or input from, other parties. These include friends, family and colleagues, but also key stakeholders, such as suppliers, customers, the public and unions. The goal here is to shun the conventional lending system that banks and insurance companies, among others, operate.
According to Professor Ramana Nanda, a
small-business finance expert and bootstrapping
connoisseur at Harvard Business School,
bootstrapping also comes into play when
startup owners feel that borrowing costs are too
high, given future growth prospects, a sluggish
economy and uncertain operating contexts.
Emad Rahim
1. Seek trade credit
Trade credit is the kind of quasi-borrowing you
get from suppliers and service providers, such as
shipping companies, utilities firms and logistics
businesses. For example, your startup can sign
an agreement with a supplier whereby you get
merchandise and pay, say, after 90 or 180 days.
The agreement gives you time to collect cash from
customers before paying the supplier, and you can
avoid borrowing to finance the merchandise.
2. Engage in factoring
Factoring means you sell your receivables—money
you expect from customers—to a factoring company
in exchange for immediate cash. The factoring
company usually charges a factoring fee, or
discount, which may range from five to fifteen per
cent, depending on your industry, the economy and
the customer’s credit rating, among other criteria.
3. Get a letter of credit from customers
A letter of credit is a note that your customer’s
bank sends to your financial institution
confirming that they have the funds available to
pay you. This letter gives you, and your banker
for that matter, peace of mind, because you don’t
have to borrow money to purchase the materials
before selling them, and you don’t face credit
risk if the client doesn’t pay.
4. Apply for a manufacturer loan
Entrepreneur Magazine recommends that new
entrepreneurs negotiate loans or financing
agreements directly with manufacturers,
especially when it comes to purchasing fixed
assets, such as office equipment and factory
machinery. Manufacturers usually provide
these loans at better rates to lure prospects,
and this is an effective way to propel your
bootstrapping efforts.
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5. Sign a lease agreement
Negotiate the best terms you can get in a lease
agreement, and shy away from purchasing office
space. You don’t have the cash, so you might as
well find the best lease deal out there that fits
nicely with your startup, industry and the main
location where your target audience does business.
Biography
Ø Emad Rahim is an award – winning entrepreneur, educator, author and community leader. He currently serves as the Assistant Dean of Business at Strayer University and Professor at the Jack Welch Management Institute. He is the appointed Endowed Entrepreneur-in-Residence for Oklahoma State University and Visiting Scholar at Rutgers University. You can follow him on Twitter @DrEmadRahim.
Don’t underestimate the funding power of your inner circle when looking for alternative ways to kick off your startup.
6. Seek cash from family and friends
Don’t underestimate the funding power of your
inner circle when looking for alternative ways
to kick off your startup. Depending on your
lineage, professional network and friend list, you
can raise enough operating money. Family and
friends are typically more prone to funding an
entrepreneur’s idea because they want them to
succeed says Jason Abaluck, Assistant Professor
of Economics at Yale School of Management.
7. Tap into your savings
Want others to show you some financial love by
helping to propel your business? Of course, the
answer is “yes.” So why don’t you start by using
part of your own nest egg? Certain retirement
schemes will allow you to borrow money
from your own accounts at reduced rates.
8. Sell equity stakes to
investors
Inviting other investors
to buy shares in your
startup is another effective
bootstrapping strategy. You
simply sell equity stakes, or
shares, of your company to
these investors in exchange
for cash. You lose some
ownership in your company,
but you avoid the often
stratospheric interest rates
charged by banks that
could drag your revenue
margins down.
9. Reduce operating expenses
Bootstrapping doesn’t simply focus on getting
money from non-lending sources, it also entails
an effective use of resources you already have.
Start by reducing operating expenses like rent,
office supplies, utilities and materials. Also pay
attention to personnel costs, and hire as many
interns as you can.
10. Be a jack-of-all-trades
Keeping with the same tactic of reducing
operating costs, try to be a jack-of-all-trades.
Wear as many hats as possible in your new
business. For example, you can be the chief
executive officer, the head of operations and
the purchasing manager.
Takeaways Bootstrapping is an art and a science, and you
should treat it as such. It is an art that you, as
a startup owner, need to polish, making sure
you cultivate the appropriate ties with key
stakeholders that will help your business grow.
Bootstrapping is also a science in the sense that
you still need to manage your business by the
numbers, ensuring that your operation generates
sufficient revenue to cover your financing costs
and eke out a reasonable return on investment.
Money issues can be the bane of your business –
whether you have too little to successfully operate
or grow it, or too much from the wrong people or
institution. Research your options carefully and
tread strategically toward the best combination of
options for you and your business.
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