What sources of funding are available to entrepreneurs at the early stage of the company?

 

• Personally Secured Bank Loans: A loan that has to be paid back with interest and may require the entrepreneur to personally guarantee part or all of the money.
• Self-funding: Using personal resources, savings or personal equity.
• Bootstrapping: Using existing personal resources and not relying on investments.
• Moonlighting and Consulting: Using the capital from the owner’s other full time job or using their knowledge to consult to other firms while their business grows and provides a stable income.
• Family and Friends/Angels: Can be a good source for start-up capital because they are not as worried about quick profits as are professional investors. Angels are high-net-worth individuals who have some funds they are willing to risk in start-up companies.
• Micro-Equity, Micro-Loans: An entrepreneur without a business plan can submit an idea on the web sites of micro-equity organizations where they can provide you with cash to live near their offices for a few months and develop plans and work on a prototype. Micro-loan is the opportunity to be lent a small amount of money if you don’t have much or any collateral by anyone.
• Factoring and Supplier Financing: Alternative to conventional bank loans. You can use purchase orders to guarantee the debt instead of providing personal or asset-backed guarantees.
• Government Programs: Federal agencies which help small businesses by aiding them and providing them with loans and venture capital financing.

 

What are “virtual” companies? What tools help them function? Why are they of interest to an entrepreneur?

 

• Virtual companies are companies that use the growth of the Internet to conserve cash and maintain flexibility in their plans. They are used to help reduce the level of monthly fixed costs.
• Virtual companies can be supported by the many management tools which can be accessed free of charge in the Internet. They can also use cloud computing which are more sophisticated management tools. Skype can be used for video conferencing, BaseCamp for projects and document management, and ADP for payroll and tax management. They can also find experts on the Internet or through personal recommendations.
• This type of company can be very appealing to entrepreneurs because they have lower operating costs. In my daycare I have to pay rent, electricity, water, etc. but a virtual company has no offices, low number of employees, low legal costs, etc.

 

Describe seven techniques for bootstrapping that you could use if you started a company?

 

• No or Low Rent: Do not spend on a separate place for an office or workplace. You can use your residence when starting off. Avoid signing long-term leases in expensive locations. For my daycare I use half of the space of the house for the children and the other half for personal use. This was an important decision in the type of license I chose for the daycare.
• Used Equipment: In the early stages it is possible to find used equipment that can fill short-term needs. You can also find used office furniture. Companies that are in bankruptcy or moving will often give away furniture or sell at low prices. When I was opening my second daycare I was very fortunate to have someone from a center in Harlem call me and ask if I wanted their furniture because they were closing. It is important to have a good network to be able to get unique opportunities.
• Cooperative Purchases: Find ways to work with other small companies to create a buyers club to get access to reduced costs.
• Outsourcing: Contract professional services that are not required full time from outside sources as needed. These services can include legal and accounting. For my daycare I use a legal company that I pay a fee to every month but have access to their services whenever I need them. The small monthly fee provides me with an inexpensive way to have unlimited legal advise and papers written and a large discount if I need legal representation in the future.
• Credit Cards: Credit cards can be used if equity or bank loans are not available. By carrying more than one credit card you can considerably boost the total amount you can use.
• Suppliers’ and Customers’ Help: Suppliers may be willing to help in many ways in the hope that the new company will become a major and loyal customer. When I was starting my daycare I created a good relationship with the managers of an early learning store that called me when they were able to sell furniture and large items that were on display in the store for a great price.
• Access to Expensive Equipment: Some universities and government institutions have labs and programs, which can help small companies by allowing them access to their equipment.

 

Why is bootstrapping important for (a) closely held companies and (b) early-stage, high-growth companies seeking equity investors?

 

• Closely held companies: To retain control of the company.
• Early-stage, high-growth companies: Used to defer the stage of equity funding.

In my experience I did not want to lose or share any control over my daycares, which is why I used many of the bootstrapping techniques explained in this chapter. I am very grateful I did that because now that the daycares are making great income I am able to keep all of the profit.

 

What is meant by: factoring of purchase orders?

 

If you are unable or unwilling to provide personal guarantee for a loan you can provide them with purchase orders from reputable customers to secure funding. They lend only a percentage of the sales order with high interest rates. The payments go directly from your customers to the lenders.

 

How can suppliers help in providing working capital?

Suppliers may be able to give you a line of credit, which is very important if you don’t have the cash on hand. You must show that you have reputable customers that will provide you with steady purchase orders.