Do you have a business ideas already?
If it is one thing that stops many people starting a business, it is that they do not have the money to start. So in this article we are going to look at options open to you to start your business with no money or as little money as possible.
We are going to assume that you already have an idea for a business, so you have a product that you can sell or a service you can provide, and you have customers ready to buy and pay. For more information on business ideas, take a look at this article.
What do you need the business loan for?
You believe that you need some money in order to start your business. Why? What do you intend to spend that money on? Some common examples would be:
- To purchase stock of goods that you can then sell or rent out.
- To pay rent for a place from which to run your business.
- To pay for staff to help you run your business.
- To buy the tools needed so you can provide your service.
- To register a company.
- To create a company website, brochures and product literature.
- To buy business equipment such as computers, cell phones and printers.
- To buy manufacturing equipment to make a product.
- To pay yourself a salary while you work on your new business.
You are probably reading this article because all your attempts at getting business funding have failed. You will have learned that banks won’t lend you money unless you already have assets, that the loan companies like Lulalend and Vodalend only finance after a you have been in business for at least a year, that angel investors want a track record either with the business or you personally and that getting Government grants is incredibly difficult. Oh, and your friends and family are too broke to help. So you have just one option left and that is what is called “boot strapping”.
What is boot strapping your business start up?
Boot strapping a business start up, sometimes known as a lean startup, is when you use the money you earned from sales to fund the business. It is a very slow way to start and not all businesses can start this way, but if you are a first time entrepreneur with nothing but a business idea, then this is probably your only option.
How you use your sales to fund your business is easiest to explain by way of an example which will follow in the next section.
How to boot strap your lean start up business.
To explain boot strapping a lean start up we are going to use an example of our entrepreneur hero who we will call John. He wants to start a business that is a hardware store, selling tools and building materials to local residents and businesses.
Step 1. Change your business starting point
The first step in the boot strap process is to change the way that you picture your business. Currently John has a picture in his head of a shop on the main street with rows of stock in the aisles from which customers can come and choose whatever they need for their building, renovation or repair projects. That vision cannot be his starting vision. Rather that is a possible vision 5 years down the road, because that business needs a shop full of stock , 3 months rent down payment, store outfitting costs, till register and accounting software, and quite possibly some staff. This requires funding of a few million Rand. As this is John’s first business, no one will lend him that.
John has to change his plan and start much smaller. No staff, no shop, no stock and no salary for himself. Instead John has to become an intermediary or a reseller. It is far less glamorous and exciting then opening up a real world shop, but it costs almost nothing.
Step 2. Arrange your supply of stock and materials.
So instead John will have to first speak to some suppliers and set up an arrangement to help him. Most companies will be happy to help a new start up business in the hope that it will become a bigger business and customer to them in the years to come. They will most likely not lend him cash or stock though. Instead he will need to negotiate good prices on small orders. They will also probably not give him an account, but he can try, even if its an account that gets paid within 2 or 3 days. He must make sure of all the conditions of an order such as how quickly they can supply and are there any extra costs such as transport for delivery of goods. Ideally he can get a few samples which he can then show his customers.
Step 3. Approach your customers.
The idea is that John can now approach local businesses in his area and offer to supply them with their tools and building materials. He hopefully has good prices from his suppliers and he can work on small profit margins because he has no other expenses to pay. These are customers that John new about when he came up with his business idea, so he already knows who to go and talk to. If he did not know these customers, then he never had a business idea. See this article for more of an explanation on this.
John must now convince his customers to buy. Once he gets the orders he should get upfront payment for these orders. This is probably the trickiest part. Many customers will be reluctant to pay someone who they don’t know. If John has managed to get a one or two day account with his suppliers it will be much easier as the customer can pay John when the goods are delivered and he can then immediately pay the suppliers. Otherwise he needs to keep trying different customers until he finds a few that will take a chance and pay him upfront for the order.
Another way around this potential problem is to act as an agent for a supplier. So John will approach customers on behalf of the supplier. They will place their orders with the supplier directly and the supplier will take care of the delivery and receive payment. In turn the supplier will pay John a commission on each sale. The down side of this is that the customers belong to the supplier, but at least John is building credibility with the customers and earning some money. Later he can then go on his own with the money he earned and pay suppliers himself.
This upfront payment or at least getting your customer to pay before you have to pay your supplier is the critical point in boot strapping. This is using your sales to fund your business. You can do it by getting customers to pay you as they order or you can do it by getting permission from your suppliers to pay them a bit later.
Step 4. Delivery and payments
John has several options on how he delivers orders to his customers. If he has his own transport he can use that, otherwise he can use the delivery options offered by the supplier or he can use a courier company to deliver the good (or a friend with a bakkie). He must just make sure to add these transport charges to the prices and quotes he gives his customers.
Whichever payment arrangement he comes up with, it is crucial that John pays his suppliers immediately. He needs to build up trust with his suppliers. The moment he pays them late, they will stop supplying him and his business will stop and fail. This is not the time to be using the money for personal expenses. Instead, any profits must be kept so that he can grow his business.
Step 5. Repeat the sales actions and grow the customer base.
For the first few months John will need to continually approach new customers to try and get orders and keep up the relationship with existing customers in order to get repeat orders. It will be hard work and profits will probably be low. No one said boot strapping was easy, but it was John’s only option.
John now has a business. Its not what he originally dreamed of, but it is a step in the right direction. He has no costs, other than to pay suppliers for the tools and materials he sells and to pay any transport costs for deliveries if he is not using the supplier for this. There is no rent, no staff, no stock, no business equipment and unfortunately no salary either at this point. This makes it a lean startup.
Step 6. Grow and evolve the business
At some stage, John will hopefully save up enough money that he can begin to grow his business. What he does first depends on his specific circumstances, but if he can continue to boot strap he can reduce a lot of the risk that comes with business loans, rental contracts and employee commitments. He can now use the saved money to start paying himself a small salary, or he buy some common stock to keep in a store room in house which will make smaller deliveries quicker and easier, or he can rent a small store room for that purpose.
Later on, as his sales volumes increase he can get better prices and profits on each order. He can add to his product range by buying from various suppliers. He can buy his own delivery vehicle if necessary. He can invest in a website and try supplying customers who use online shopping.
John now has a fully fledged, proper business and it all began with a change of vision and some boot strapping.
How could boot strapping work in your business
The example of John and his hardware store is just one of many possible business scenarios. In order for you to be able to boot strap your business you will need adapt your business model appropriately, here are some simple examples:
Instead of opening a restaurant, deliver home cooked meals. Here you don’t need an expensive restaurant shop with cooks and waiters, and you can get customers to pay prior to delivery and not after they have eaten your meal.
Instead of opening a hair salon, offer to got to people’s houses to cut do their hair in their homes.
Instead of starting a stationery supply business with a warehouse of stock, do something similar to what John did in his hardware store.
Instead of starting a furniture factory, begin by selling furniture for an existing furniture factory.
Hopefully you get the idea and can make this method work. A useful service which might help you in keeping your start up costs down can be found on this page.