Bootstrapping A Business: Financing Lessons Learned

By: Kent Lewis, President and Founder of Anvil Media and Formic Media
anvilmediainc.com

I’ve spent nearly my entire career in the agency world, learning the ropes at four full-service marketing firms. In 1999, a former boss gave me an opportunity to be a founding member of a new agency. Since then, I’ve founded or co-founded three interactive agencies and two industry associations. I’ve learned a few tricks along the way, especially creative ways of funding a new venture.

Most agencies are self-funded, primarily because the capital expenditures are fairly low in a knowledge-based business. The first agency I co-founded was funded with the proceeds from a 401K. Unfortunately, over-extending on leased space eventually put the company in a dire financial situation. After parting ways with that agency, I founded my own search engine marketing agency, Anvil Media. Learning from previous experience, I too, elected to self-fund the company.

I knew out of the gate that cash is king, and that effective cash flow management can separate financial success from bankruptcy. For the first few years, I kept overhead low by utilizing contractors, but by 2004, I realized I needed to hire employees in order to grow profitably. By that time, I’d developed a good relationship with my bank, but didn’t secure or utilize lines of credit until I had nearly a dozen employees. Credit cards were used only for basic business expenses and media fees, and were paid off every month.

Between 2002 and 2008, I self-funded two other agencies and a professional trade association. In each case, I relied on existing relationships with financial institutions and vendors, which reduced my costs and reduced their risk. We didn’t need or want equity funding from outside investors, as it would have meant giving up too much control. We also avoided loans requiring personal guarantees. We were selective about securing credit lines and credit cards.

Feeling that I lack the funding horror stories experienced by my previous employers, fellow entrepreneurs and peers, I decided to conduct a little research. In a recent LinkedIn survey, I asked business owners and consultants about financing a small business, and they responded with a variety of insights. I’ve highlighted some of the best responses below:

"We started from scratch without funding and then eventually got a line of credit when we started to grow to manage employees' payroll and timing of AR receipts. A long time ago I did finance (lease with a $1 buyout) the purchase of major equipment and will never ever do that again unless I have no other options," stated an anonymous Portland-based agency owner. "In hindsight, I would have just put in on a credit card."

"I've bootstrapped my business with no outside investment ($100 for a checking account) funding it all from cash flow. I do have lines of credit now, which I have applied for during both down times and good times...and learned of course that it's better to apply when you are doing great and don't really need it. I think my biggest lesson has simply been that understanding finance is critical in any business at all, at any size, and at any stage," said Jeff Stephens, CEO, Creative Brand Communications. "If I had it to do over again, I'd scrap advertising school and would have gotten a finance degree."

"Start ups are certainly in need of short-;term financing solutions, and credit cards are one answer" says John Calian, former COO and co-founder of mobile startup Movaya. "Just make sure you are constantly aware of your balance and payment schedule."

"I've found a combination of growing a personal relationship with local bankers, business associations and chambers of commerce are a great way to learn how the game works and for them to get to know you and your business, and the prudent use of credit cards (making sure to pay them off every month) have enabled me to grow my business," said Tim Ernst with RavenWood Creative.

As you can see from business owners and consultants around the world, the preferred method of financing a company is through self-funding. For those lacking the funds, debt financing via credit card is relatively easy, but can have significant downside if not managed carefully. Loans and lines of credit have similar downsides, if cash flow isn’t sufficient to ensure timely repayment.

Equity financing is perhaps the most intimidating, and owners can lose control of a business, yet it can offer the quickest growth path for a company with larger capital expenditures or break-even points. Regardless of your preferred method of financing, I recommend carefully researching your options, talking to individuals or organizations that can help (i.e. SCORE, Entrepreneur’s Organization and government organizations).