Starting a business without borrowed money is an awesome thing. The lack of readily available funds forces you to concentrate on the basics, maximizing resources to save capital for when you really need it. Your discipline is sharpened and you don’t waste resources on stuff that doesn’t translate to bottom line success. But sometimes, business owners need to borrow money to grow or start their businesses. I recommend borrowing money as a last resort, and when you do borrow, utilize your bootstrapping ways as a first line of defense. Only resort to banks and other official sources when all avenues have been exhausted.
So what are the bootstrapping ways of borrowing money and what other unofficial sources are out there other than banks? I’m glad you asked…
- e-Bay – Sell your stuff. You’ve probably got an attic or basement or both full of stuff, junk mostly. But some of it could be dusted off and sold on e-Bay or other auction sites, in a local antique or flea market or at a garage sale. Remember the adage, “One man’s trash is another man’s treasure.”
- Pawn Stars – Pawn valuable stuff you don’t want to sell. Okay, this isn’t a great plan for long-term financing of your business, but it could be used to raise a small amount of capital for an immediate need that could be repaid with other more long-term sources of funding. It’s a way to raise capital quickly, in a pinch.
- Car Equity – Tap into your car’s equity. Refinance of finance your vehicle to get the ‘equity’ out of it. Just remember, as your vehicle gets older, its value will decline and so your opportunity to get cash from it.
- Credit Cards – Borrow money off your credit cards. While this technique isn’t as readily available as it once was, you can use personal credit cards to pay your business bills. Apply for cards and use balance transfers to pay off older balances with new cards at introductory rates. I have a friend who built a house using credit cards to finance the construction. He paid the cards off with a permanent first mortgage after the construction process was over. This is a short-term solution as credit cards have high interest rates. This also isn’t a solution for individuals who have no money management skills. Wait! On second thought, starting a business isn’t a good option for individuals with no money management skills.
- Family – Borrow from your family. An infamous local entrepreneur is often quoted as saying, “Don’t borrow money from people you sit across the Thanksgiving table from.” The downsides of borrowing money from family are too many to enumerate. However, the transaction can be fast and easy if you have a family member who has the extra cash and is interested in investing in your business. There are two keys for borrowing money from family. First, don’t borrow money that the family member will likely need to live on. Unless you plan to support the family member and be responsible for all the bad things that happen to them when their living expense money disappears because your business couldn’t repay the money when expected or needed. And second, treat it like a bank loan. Get a note document on-line and modify it to meet your needs and then live by its terms.
- Friends – Borrow from your friends. SEE #4 above for ground rules.
- Local ‘Angels’ – Borrow from local business acquaintances and professionals. Most ever city and town has a group of wealthy citizens, whether they are retired businessmen and women or professionals or maybe they inherited their wealth. The point is these people have more money than they have good options for investing it. If you have an interesting plan and can compellingly sell your idea, these folks may be just the ticket. You’ll need official legal documents, but it’s significantly easier than borrowing from a bank.
- Vendors – Borrow money or products from your vendors. If you have a major or potentially major vendor, they might be interested in help you establish a business. These vendors have a vested interest in your success since you’ll be buying must of your product from them. In some cases, these vendors maybe willing to help you get your business established by either loaning you money, product, location or other resource to help you get in business.
- Factoring – Sell your accounts receivable. Factoring may not be a great way to get into business, but is can help in the beginning. If you have some large accounts receivable from a special job or large order, consider factoring. You sell your receivable to a third party firm in exchange for cash. You’ll receive between 70% - 90% of the value of the receivable, depending on the risk involved. It’s an expensive financing method, but might help you out in a pinch or allow you to take a huge job that you wouldn’t have been able to take otherwise. Just remember to factor in the cost in the analysis.
- Clients – Borrow from clients or have them pre-pay for services. While this may seem like a dumb move, your clients may be intimately knowledgeable of your start-up plan and more than just a disinterested third party in your success. Your client may help you to get started so that you can provide products and services to them. If you have an excellent relationship with a potential client who could benefit from your success, maybe they’ll help you get started. If they aren’t interested in loaning you cash, maybe they’ll pre-pay for products or services at a slight discount to help out. I don’t recommend that you ask random clients to borrow money, but for those clients with whom you have a special relationship, this could be a great option.
When all else fails, consider these options.
- Investments/401(k)/IRA – Borrow from or liquidate retirement accounts. You may have options for borrowing from or cashing out investment and retirement accounts. These are more last available option type choices, but they are available if you have money invested in these type accounts. Remember, withdrawing money from a pre-tax retirement account will mean tax penalties and income taxes have to be paid on these withdrawals. Factor these costs into the equation and understand the consequences before using this source.
- 529 College Savings Plan – Liquidate or borrow from your child’s education fund. While using your child’s college savings to start a business might not be such a great idea; it might have to do in a pinch. This is another last line of defense consideration. Just be prepared for your kid to work her way thorough college if your business doesn’t make it. On the other hand, you’ll be especially concerned about achieving success and paying this money back before her college years begin.
- Home Equity – Tap into your home’s equity. Either refinance your home mortgage or take a second mortgage or equity line of credit to utilize the equity in your home. I consider this a second tier option due to the possible side affects should your business fail.
Have you got some other ideas? Let's hear them.