I am an optimist. It does not seem too much use being anything else.
Starting and growing a business on a shoestring may not be the optimal choice, but in many cases, it’s the only choice. And in fact, starting on a shoestring puts you in good company. It is safe to say that most start-ups begin without as much money as the owners would like, but they get off the ground anyway. They succeeded, and you can too!
But understand this: Although starting and growing a business on a tight budget is possible, it is not easy. Doing it successfully requires several things: the right attitude, a good idea, possibly OPM (other people’s money), and frugality.
The Shoestring Startup Rules
Although many start-ups do not have optimal funding, a shoestring start-up is a different animal. Starting on a shoestring means that, rather than having less than optimal funding, you have little or no funding at all. It means really starting from scratch. But you can do it. Countless others have done it.
To do it right, you need to begin your bootstrap entrepreneurial journey with a grounded understanding of what it will take. There are four rules of the road to follow:
1. Know that fortunes have been made on minuscule beginnings. Peter Hodgson borrowed $137 to buy the goop he would rename Silly Putty. Arnold Goldstein, author of Starting on a Shoestring, began his first retail discount store, containing roughly $100,000 of merchandise, using only $2,600 of his own money.
Take real estate for example: This is one way you could start on a shoestring right now. By obtaining a 10 percent loan from the Federal Housing Administration (FHA), you could buy a $150,000 duplex for $15,000 down. That is amazing. Even without 90 percent of the money needed, you could start a real estate business. Or you could start an e-commerce business. Or you could start a service business.
There are ways to do it. If others have done it, you can, too.
2. Understand the difference between good debt and bad debt. When you do not have enough money, you usually have to go into debt to start or grow a business. Not always, but sometimes. But it is important to understand that not all debt is bad debt. Bad debt is unmanageable. Credit card bills that you cannot pay are bad debt. But debt that helps you get ahead in life—start a business, buy a home, or finance a college education—is good debt. Most millionaires start out in debt, but it is good debt. No, it is not ideal, but if you have a plan to pay it back, start-up debt can be good debt for you, too.
3. Serve the market. Every successful business must serve a market need. Whatever your shoestring idea is, it had better be a darned good one. Shoestring entrepreneurs rarely get second chances. Tapping friends and family to help finance your dream can happen only once. Invest in only your best, most viable idea, or suffer the consequences.
4. Shoestring businesses require creativity. Improvising, making do, juggling, and borrowing from Peter to pay Paul will be necessary if you have to start or want to grow a business on a limited budget. Hire students. Buy some software and learn how to design your own website. Ask for free help. You will have to be highly energetic and very creative if you are going to succeed in this sort of endeavor.
You Gotta Believe!
Northwestern University once conducted a survey of successful shoestring entrepreneurs and discovered that most of them had never owned a business before, had little business education, and, even though they did not have enough money, started a business anyway. Essentially, they did know enough to realize that they should have been afraid. You have to have the same chutzpah. To be successful, you will need to be out there raising money, selling, projecting a confident image. Shoestring entrepreneurship is for the hearty alone.
Other People’s Money
There are two types of shoestring operations. The first is started on a shoestring without borrowing any money at all. Maybe you have $500 or $1,000 or $2,500 and want to start a business on your own but do not want to take on any debt. Usually, such ventures begin as part-time home-based businesses that grow incrementally.
It is possible to make a go of it, but the margin for error is so slim that it makes the possibility of succeeding very small. Nevertheless, that sort of shoestring entrepreneur will find still find help in this unit, and in all our units!
The second type of shoestring entrepreneur is one who wants to start a business without much of his own money or who wants to grow his existing business but lacks the funds to do so. These entrepreneurs will have to get some funding somewhere. They will have to use other people’s money.
The challenge is finding that other person with the money. But that’s what we’re here for!
Finding that money is a two-step process. First, you will need a solid business plan. No investor will put money into your idea based on the idea alone. You will need facts and figures to back up rosy rhetoric. You need a business plan.
Then you must go out and start knocking on doors. Funding a start-up without your own money is a numbers game. You will likely need to talk to a lot of people before getting the money you need. Begin with friends, family, business associates, and professional colleagues. Most of these people will want to see that you are investing in the business, too, figuring that if you are unwilling to take a financial risk, why should they? If you have no money to put into the business, you have to be up front about that.
Explain that your time, effort, and expertise will be your investment, and that is worth a lot. If you have some money to invest, do so. Even a little bit can impress. Try not to get discouraged. Remember, it is a numbers game. Chris Haney and Scott Abbott spoke with more than 100 people before getting 32 to invest about $2,000 apiece to fund their business based on a game they had just invented, called Trivial Pursuit.
Understand that, armed with a business plan, a good idea, a winning smile, and little else, you represent both peril and promise for would-be investors. The peril is that you could take their money and lose it on some untried scam. The promise is that you could take their money and make them wealthy with your great idea. Your challenge is to prove that the latter is far more likely to occur than the former.
1. Be a Pro
The key to winning over any investor is to look like a pro. If you talk big without having the facts to back you up, you will look foolish. You have to be a businessperson. Draft a business plan. Have your elevator pitch ready. Know your market. Know your numbers. Know thy competition. Be able to defend your plan of action. Explain with conviction why your plan is a great opportunity for the investor.
The friends and family plan works sometimes, and sometimes it does not. If it does not work for you, here are a few other viable shoestring funding sources.
2. Get Creative!
You will see in our Money Unit that we have a plethora of creative ways to find the money. Be sure to check them out!
3. Locate a Partner
Many partnerships begin because one person has the idea, skills, experience, or opportunity and the other has the money. If you have the desire and passion to start a business or need to grow your present business but lack the funding to do so, then teaming up with the right partner—one who has money—is a very real way to fund the plan. Of course, you will have to give up half your equity, but that is a small price to pay to live your dream.
Chester Carlson was an inventor by nature. When he landed a job in a patent office that required him to duplicate detailed patent applications by hand, he decided that there had to be a better way to re-create them. So at his workshop at home, Carlson began to tinker and fiddle.
He eventually figured out a process that would allow him to reproduce documents electronically. Carlson then spent the next few years trying to sell his invention to companies such as General Electric, RCA, and IBM.
He had no success.
He was an inventor, not a salesperson. Then a man named Joe Wilson heard about Carlson’s invention. The president of a small photographic company called Haloid, Wilson went to see Carlson, saw a demonstration of the process, and said, “Of course, it’s got a million miles to go before it will be marketable. But when it does become marketable, we’ve got to be in the picture!”
Wilson and Carlson decided to become partners—Carlson had the invention, and Wilson had the money. Haloid eventually pumped $100 million into Carlson’s invention before taking it to market and naming the machine, and the company, Xerox.
The question you probably have is, where can I find that magic partner? There are several sources:
- You start by networking. Speak with your lawyer, accountant, and other business associates. Talk to friends, family, colleagues, and people where you worship. Get the word out. Networking works.
- Consider speaking with people in your line of work who have retired. They may want to get back in the saddle or become a passive investor or partner.
- Conduct a Google search
- Post an ad on Craigslist
- Put the word out via Twitter and other social media
When speaking with potential partners, you will get the money you want only if the partner gets what he or she wants. It may be that the partner wants a say in day-to-day operations. It may be that he or she just wants a monthly cut of the profits.
Here, then, is another winning concept from the desk of the successful small business person: ask investors what they want and give it to them. Your partner might want to be a 50–50 partner, as Joe Wilson and Chester Carlson were, or your partner might want to be a “silent” partner who merely wants to invest in return for a share of the company. You will get what you want if your partner gets what he or she wants.
4. Supplier and Distributor Financing
Distributors and suppliers want your business, and they know that by offering you some financial assistance, they may be able to turn you into a long-term repeat customer. Your job, then, is to show them that if they lend you some money to get started, they will get your continued business. This happens more often than you might think.
Suppliers or distributors will want to learn about you, visit your business (if you have one), and check your references. Like any lender or investor, they need to be convinced that you will be able to pay them back. The key to success is preparation. You need a solid plan showing how helping you will help their bottom line.
When structuring any finance deal with a potential investor in your shoestring business, work to make the deal a win–win situation. When structuring a loan or investment deal, keep these points in mind:
- Ask for more money than you need. If the investor balks and negotiates down, it will not be a crisis, and if not, you will have more than enough.
- Make sure it is your company that takes out the loan. You incorporated, right?
- Get the interest rate as low as possible. Everything is negotiable.
- Work to get as much time as possible to repay the loan, with no prepayment penalty.
Keep Your Overhead Low
Shoestring entrepreneurship extends well beyond financing. You have to be vigilant about keeping your expenses to a minimum in every area.
Rent is one of the biggest expenses a business has, so minimizing your rent is imperative. In today’s post-Covid world, with so many people working from home, rent may be less of a consideration. If you can start your startup from home – do so!
If you do need a physical location, then be sure to avoid the high-profile location and its high-profile rent. Instead, think like a shoestring businessperson: Rent a smaller space than you would like. Rent in an out-of-the-way. location. Start a home-based business if you must. Just do not blow your dough on rent.
Another low-cost option is to start your business in a business incubator. Business incubators are partnerships among public, private, and nonprofit organizations that work to promote entrepreneurship and small business growth. They do this by providing inexpensive space from which new businesses can be launched. Incubators usually offer free (or very inexpensive) administrative service assistance, legal help, business planning, financial advice, and so forth. As the name indicates, they are places that nurture, or incubate, a business while it learns to spread its wings and fly.
Although all business incubators work to launch successful businesses, each is unique. In Silicon Valley, for example, many business incubators foster computer-oriented start-ups, whereas in Wisconsin, incubators may foster dairy and farming-related businesses. It depends on the region and the incubator.
There are many benefits to be derived from starting your business in a business incubator:
– Reduced rent
– Financial and business assistance and expertise
– Shared services
You can find out what types of incubators are available in your area by contacting the National Business Incubation Association (www.nbia.org).
Shoestring entrepreneurs are always looking for a bargain. They buy furniture, equipment, and fixtures used, and if you are shoestring, you should, too. The Yellow Pages are a good place to start. The Internet is a bargain hunter’s paradise; eBay is but one of many places to look.
If you cannot find what you need used, many manufacturers will finance up to 90 percent of your new purchase, preserving your precious capital. Consider leasing any fixtures or equipment you might need.
Stocking the shelves of your store when you have a small budget is also possible. How do you do that, you ask? It is similar to a method mentioned earlier: you need to find suppliers that will give you their goods on credit. There are thousands of wholesale product manufacturers, suppliers, and distributors looking for business. One way for them to get it is to stock your shelves without requiring an up-front payment for the goods. They are paid when the goods sell.
Start by preparing a powerful package that proves your pluck, thereby inducing them to want to work with you. It should contain your business plan, stationery, letters of reference, the name of your lawyer and banker, and so on. Anything that gives you legitimacy helps your cause. Explain how much inventory you need, the terms you propose, and how and when you will pay it back. You need to convince the supplier that you are likely to become a new client who will be buying their goods for many years. That is what works.
After you have the package ready, you need to contact the sales rep from the supplier, manufacturer, or wholesaler whose products you want to purchase. Present the package to each one and ask for an appointment with the company’s credit manager or regional sales manager. You stand a pretty good chance of success if you have a good package, a decent credit rating, and some trade references.
If the supplier agrees to stock your shelves for no money down, you will need to agree to continue to buy from the company for the term of the loan. You will also need to agree to grant the supplier a security interest in the merchandise, meaning that if you default or go bankrupt, the supplier gets its merchandise back.
If starting an online business, check out something called Drop Shipping. Suppliers will help you stock your virtual shelves and even ship your orders for you.
The other key to inventory of course is to find inexpensive wholesalers. Alibaba and Amazon are great for this for starters.
Buying a Business with No Money Down
Is it possible to buy an existing business with little money of your own? Maybe. It is akin to buying a small piece of real estate without a lot of money. Remember that $150,000 duplex? Using a 10 percent loan obtained from the FHA, you need only $15,000 to buy it; the bank secures the loan with a lien against the property and loans you the rest.
That is called leverage—with the asset securing the loan, you can leverage a small amount of money to make a large purchase. Leverage can be applied to the acquisition of a business, too. The secret is to find a willing seller who is open to some creative financing.
If you can get a conventional bank loan, great. Existing businesses have track records and assets (accounts receivable, autos, machinery, and so forth), so getting a bank loan is certainly possible. However, if you cannot get a bank loan, you still might be able to buy the business using seller financing. Sellers are often willing to finance some or all of the purchase.
Sellers need buyers, and if your purchase is made contingent on seller financing, the seller just might do it. Buyers are not always easy to find. Of course, the seller will want to secure the loan with the ability to foreclose on the business and take it back if you default. That is fine. If you agree to that (and you should), then getting the seller to finance your purchase is very realistic. The optimal plan would be to combine bank and seller financing. Say, for instance, you want to buy a furniture store that is worth $100,000. It may be that the bank will finance half if the seller finances half, and away you go!
But what if the seller is willing to finance, say, 40 percent, and the bank will only match that amount? What if you need additional creative financing options to swing the deal? Where do
you find that $20,000? There are several choices:
Debt financing. Business sellers include in the asking price the amount they need to pay off their business debts. If you agree to assume those debts, you can reduce your down payment by that amount. Are you willing to assume $20,000 of the seller’s debt?
Inventory financing. When you buy a business, you also buy its inventory. If you are short $20,000, find out whether the owner will agree to liquidate $20,000 in inventory. You then reduce the purchase price by that amount. Similarly, the owner could sell a business asset worth $20,000—a truck, machinery, or even a piece of real estate.
Broker financing. The majority of all business sales are done through a broker. Find out whether the broker is willing to reduce his or her commission to keep the deal alive.
Supplier financing. Check with the business’s suppliers. They may agree to loan you the $20,000 if it means they will continue to have a major account.
There are many ways to finance a business purchase with no money down. Creativity and a willing seller are all that is required.
Bottom Line: Welcome aboard! We are here to help you get started, and then succeed in your shoestring startup. We can do this!
Fire your boss, make more money, live the dream, break free!