Over the life of your business you will use one or more of the following approaches – “colors” – to generate needed:
We call these “four colors” because they are distinct in terms of who is providing the cash, how you access the cash, and what are the “strings attached.”
There is no generally accepted definition of bootstrapping as an entrepreneur financing technique. Here at 4CME we have a precise definition:
Bootstrapping is the use of founders’ personal financial assets, plus a collection of techniques and strategic choices that reduce the cash required to achieve business objectives, plus reinvestment of positive cash flow back into the business.
Under our narrow definition we specifically exclude “Friends and Family” financing from our definition of Bootstrapping. We’ll talk about why in another post, but anyone writing a check to loan, grant or invest in your business falls under the Other People’s Money (OPM) headline. You need to be thoughtful about OPM, and most importantly not get addicted to it! OPM addiction is a periodic epidemic in Silicon Valley.
Debt is the most common type of OPM and comes in many, many, many shades. All forms of debt consist of:
• an amount loaned to the company (or individual), aka the “principal”
• a repayment schedule that has a defined end date (“term”)
• an interest rate charged periodically on the remaining balance
• fees charged for a variety of reasons
• contractual terms.
Beyond those things in common, debt comes in a dizzying number of forms. Not all of them are available to entrepreneurs, but during a company’s first decade of life the possibilities are quite wide ranging. Among those are:
• credit cards
• term loans
• revolving credit lines
• equipment leases
• SBA loans (US).
Grants are cash given to individuals, non-profits and companies with no expectation of financial return. Grants are sometimes thought of as “free money” but in most cases there are strings attached – sometimes in the form of an extensive application process, often in terms of reporting results that the grantor wants to achieve by providing the grant, sometimes recognizing the grant giver in publicity.
Governments, foundations and individuals can all be sources of grants. Those targeted for business include US federal grants to encourage technology development by small businesses, and prize money in numerous business plan competitions.
Equity financing involves exchanging ownership in your company in return for cash. That ownership interest may be newly issued shares if you have a corporation, or management interests if it is an LLC.
Friends and family, angel investors, venture capital firms, “the crowd” through equity crowdfunding can all be sources of equity financing for companies.
That’s the start. There are many shades of the four colors – we can count fifty shades of debt! – and lots to understand about what is right for you company at this moment, and how to access the financing that’s right for you.