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With millions of dollars in home and business loans in default right now, banks have become much more selective about to whom they will hand out loans. This means it has become increasingly difficult in the recent for small businesses to get loans for start-up companies. Don’t let stingy banks break your entrepreneurial spirit. A growing start-up businesses getting off the ground without even stepping foot inside the bank (with or without the black ski mask).
The method to which I am referring is known as “bootstrapping”. The term refers to a 19th century American saying about pulling oneself up by his/her own bootstraps (i.e. to accomplish an impossible task without any help).
In a business sense, it refers to getting a business started using only the resources available to them, and it is becoming a more popular start-up business model. Bootstrapping entails the owner pulling from pools of small capital available to them (e.g. credit cards, personal savings, or loans from friends and relatives) and using this to make their initial sales. The sales are then used as a starting block for the rest of the business.
Here are a few ways you can pull initial capital from funds that you may already have access to:
Your Own Money
One of the most popular methods for getting the initial start-up capital is to dig into the funds most readily available: yours. Personal savings are easy to access and don’t involve you going into debt right off the bat. The fact that you are willing to put your own money on the line sends the message to possible investors that you have faith in your own future success.
It is best to start off by pulling money from sources that are not generating a lot of interest. Checking and savings accounts generally don’t produce a lot of interest, so they should be your first line of capital. Selling off items in your stock portfolio would be the next source from which to draw. Pulling from your retirement fund is an option, but it is not recommended since doing so involves large penalties.
Home is Where the Cash Is
Home equity loans used to be a very good option for generating the capital needed to get a company up-and-going. I say that it “used to be” because the downturn in the housing market has decreased the amount of home equity available drastically. Because of this, banks are very hesitant to hand out money for home equity loans.
Although the banks are hesitant, it is not impossible to get a home equity loan. The possibility is still there, but there are stricter equity and credit prerequisites that must be met before they will pass them out. It helps to consult different lenders to ensure that you are getting the best rate on the loan.
Paying with Plastic
This tactic comes with a much greater risk, but a savvy owner can always turn to the plastic as a quick-fix fix for the extra cash they need to get started. Credit cards should not be a permanent solution, but if you are going to do so, then you should try to get the most return for your risk.
If you quit your full-time job to pursue your business venture, it can be extremely difficult to access the credit you need. It is better to get access to the funds before you put in your two-week notice. The other tip is to borrow on a credit card that offers you rewards you can use for your credit card purchases. If you are going to melt the plastic, you may as well get as much as you can in return. Cards that offer cash back on credit purchases is the best since it decreases the amount you will owe, but if that isn’t available then select a rewards program that offers something that can help contribute to the success of your business venture.