Bootstrapping

2 July 2008

The reduction in venture funds has not dampened the entrepreneurial spirit in Ontario. I’ve been very impressed by the number of companies that are managing to develop despite the lack of 3rd party financing. Most are finding ways to get by and are probably stronger for the effort.

Referred to as “bootstrapping”, companies are finding ways of generating enough cash to get by without (or with limited) external investments or debt. A quick Internet search for the term shows lots of resources for companies that are trying to follow this model. The key element is cash management. More than profits, quality or anything else, getting more cash than you spend is key and that makes “cash now” the main tactic.

To generate “cash now” you want to make as many sales as possible as quickly as you can while getting paid in advance if possible. Any agreements you make to pay for services should be made to pay as late as possible. The company’s survival depends on the slight difference between the time the money comes in and the time it is used. A few days can make the difference.

It is possible to turn just about any future cash payment into cash now if you talk to the right people. (See Acorn Partners.) Investors are out there who will buy your future SR&ED tax credits on your R&D efforts, your future credit card receipts, your future invoices, or your existing accounts receivable. Its expensive – often 75 cents on the dollar – but comparable to offering a 25% discount to customers if they pay immediately rather than on net 30 terms. If you have accounts receivable, you may be able to get a bank to provide a credit line based on the amount of AR you have. It is a good idea to get these accounts insured up-front by EDC.

The opposite applies to costs. Don’t buy anything unless you will absolutely fail without it. Beg borrow and scrounge as much as possible. If you do buy, barter first and then buy on credit with the longest possible terms and the lowest monthly payments. Avoid paying cash up front for anything.

Be smart about it though. Bootstrapping involves all kinds risks inherent in the decisions made as you try to make quick sales. It takes good judgement to get the right balance between fast and good and to avoid desperation. You can’t sell at a loss just to get cash and expect to be in business for long. You must also honour your commitments. Successful businesses are built on trust and cooperation. Recognize that you are building your reputation along with your business and act accordingly.

Above all, have fun!

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