Capital Building Strategies

Before the era of wealthy individuals and businesses seeking profitable places to invest their capital, businesses were primarily built through bootstrapping – or cash-flow management. That's how most of us started and are trying to build our businesses today.

There's a real benefit to building capital and growth in this manner. The experience of setting and living within a limited budget on a small scale is excellent training and proof to potential future investors that you know how to run your business.

In this article I’ll share with you strategies I've used myself as well as options that other businesses have successfully applied. Many of these ideas are not new, but you may not have realized how they could help you defer the need for outside capital and still grow your business.

DEVELOP A FRUGAL MINDSET

I grew up in a blue-collar working-class family. My sister and I were each given a very small allowance which we used for the "extras" that all kids need. In those days it was records and the "in" clothes, mostly. If we really wanted something special that cost more, it meant we had to give up something else. We learned at a very early age to be frugal. We knew what it meant to live within our budget.

Frugality doesn't mean being cheap; it means being careful with your money and other resources, knowing that they're limited. Develop a frugal mindset. Carefully assess the return on investment of every expense. You want to get the most for each dollar spent.

CREATE STRATEGIC ALLIANCES

You don't have to give part of your business away to work out mutually beneficial business alliances with suppliers. If you can open a new market for a supplier who'll consider alternative business arrangements in order to grow, you may be able to offer something of value in exchange for deferral of payment. Or perhaps you can become a critical intermediary in the supply chain. Your leverage will be greater as the potential for more business increases. There are lots of potential creative arrangements when you work with someone who can forgo immediate capital for a greater long-term benefit. Go ahead and take the lead in identifying these sources.

SELL BEFORE YOU PRODUCE

Rather than creating an inventory of products that might not sell, create a prototype or model and take orders for delayed delivery or offer a test of your service to a small number before fully staffing up for it. For production with up-front costs, you may be able to obtain a partial deposit. This works especially well for sizable orders and gives you some working capital to apply to producing the product or service. Anything that's customized should always require a deposit. It's tempting to take a big order from a new, desirable customer without a deposit, but you put yourself at high risk.

OUTSOURCE

Unless it's imperative that you have the equipment and staffing to provide a support function, or even a critical production/delivery function, it's worth determining what it would cost to outsource. By outsourcing you're saving the up-front capital cost of hard assets and human resources. Outsourcing is a great way to test a new product. The caveat here is to be prudent in your selection. You may even be able to joint venture with some providers -- it's worth a try.

STREAMLINE

With the help of your financial advisor, coach or consultant, perform an analysis of your operating expenses. Look for areas that seem out of line. Then look at these more closely to find out where you may be able to cut. Be sure your accounts receivables are as timely as possible. Don't let someone else have the benefit of using money that's rightfully yours. Work out term payment arrangements to suppliers if you need the capital now. It will cost you more, but it's probably less expensive than an outside loan.

THINK "VIRTUAL"

Lots of thriving, growing businesses today are merely networks of individual service providers who join together to perform an agreed-upon function. These are often in far flung locations and communicate by e-mail, fax, phone, extranets and sometimes even snail mail or courier. In a sense, everything is outsourced. The costs of doing business virtually is usually much less than any other method and seldom requires heavy capital expenditures. Consider what aspects of your business can be done virtually.

BORROW SHORT TERM

If you do have to borrow, think short-term. The borrowing costs will be less and you'll avoid those nagging ongoing monthly payments that will eat into your monthly cash flow. A credit line is a good first step. (See Tip below for more information.) With the rapid changes in today's banking industry it might be hard to develop a relationship with one person at your bank, but it's desirable whenever possible so they get to know you and your business. You may want to consider working with a bank that's courting small businesses -- and many are these days. Chances are they'll be willing to work with you on addressing your needs.

PLAN LONG TERM

Use your long-term (3-to-5 year) plan to determine where you might need large amounts of capital during the period. If you see the need for probable investor capital, start planning and networking early so that you have some viable options when the time comes. Meanwhile you'll have created a business that will be attractive to investors.

I hope you can begin to see that there are lots of ways to use ingenuity rather than other people's money to grow your business .Yes, it might take a little longer, but you'll be able to retain full control of your company. In the process you'll have learned what it takes to create value for an investor, lender or purchaser when you're ready to open your business to outsiders.

By the way, if the next stage of your business is truly dependent on outside capital, these strategies can still be applied. Capital conservation is always a good idea.

Tip: Convert to a Business Credit Line

Many small business owners use their personal credit line to help get their business off the ground. This works for the short term. When your business is grossing steady annual revenue and has a 2-3 year track record, it's time to seek a line of credit based on your business. Of course, it's best to apply when you don't actually need it. You know the old adage about that.

When you're ready, contact your banker and inquire about what's needed to support the application. If a brief business plan is requested, don't be afraid to ask your banker for guidance.

A line of credit is an excellent first step in establishing your credit-worthiness for future borrowing or outside funding. Pay down credit line balances as soon as is practical so you'll have the available credit when needed. You’ll also be establishing a solid credit history.