David Deeds directs the Morrison Center for Entrepreneurship and is Schulze chair of Entrepreneurship at the University of St. Thomas Opus College of Business. He can be reached at:
Ask the consultant: How to get working capital for a young business
- July 22, 2012 - 11:11 AM
QOur two-year-old company has young owners who have no assets to collateralize. What are the best ways and practices to get working capital for a business without giving up equity?
ANDREW KITZENBERG, Founder/president of Memory on Hand, firstname.lastname@example.org
AThe challenge of financing a start-up is huge. Early stage equity is expensive and avoiding it is wise. But how do you fund the business? The answer is bootstrapping.
Bootstrapping falls into two categories: minimize cash expenditures and generate early cash flow. Minimizing cash expenditures includes working from your home, buying used equipment, borrowing equipment, etc. This aspect of bootstrapping is a mind-set. You must constantly look for ways to avoid spending money while still building the business.
The second aspect -- generating early cash flow -- addresses the question. Personal savings, including 401(k)s and other retirement savings, are the place to start.
While tapping savings is not recommended by financial planners, neither is starting a high-risk venture. Credit cards and home-equity lines are an obvious source of capital and pale in comparison to the costs of early stage equity. Credit is tight, but this is still the most widely used source of capital for ventures.
Trade credit from suppliers is a critical source of working capital. Negotiate terms with key suppliers as soon as possible. A 30-day payment plan is superior to a collect-on-delivery or COD plan. On the sales side, minimize collection times -- offer discounts for quick payment. SBA Loans are a great source of working capital. There are also a series of actions that you can take to develop early cash flow. Keep your day job. A few more months of salary make can a huge difference. Seek consulting projects with your former employer. Sell or distribute other company's products. Keep your eye out for cash-generating opportunities.
The benefits of bootstrapping are control and ownership of the upside. Besides, it is the only way most of us can start a venture.
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