Merchant Cash Advances: Another Form Of Bootstrap Capital
Bootstrap Capital or Self Capitalization is about using OPM (Other People's Money) to help you start your business. It is the way that most businesses get started. Many of my students think that they need to appear on Dragon's Den and win a few hundred thousand dollars in the competition before they can get their business started. Or they have to apply for a government loan or grant or get VC funding...
I have found that if they put the same effort into finding pre-launch clients and customers, for example, they would be much further ahead: they would have proven their business concept works, they would have real customers and real cashflow: real power comes from cash that is really yours.
I read an article in BusinessWeek today that taught me a new form of bootstrap capital, one I hadn't heard of before; it's called 'merchant capital advances' and you can read the BW article below.
What a number of companies do is they will give you what amounts to a loan and take repayment from credit cards you process in the normal course of your business. So if you are a small business and you can't get financing anywhere else and you do a fair amount of credit card processing (maybe you sell art online, or run a restaurant or whatever), this is one way to get funded. But it is expensive. Certainly, it appears to cost what it would cost you to run a month to month balance on your credit card: from 18% to as much as 50%. So if you are going to borrow money this way, you better be sure the payoff is in excess of that. Trust me, it makes no sense to borrow at, say, 22% if your ROE is only 8%. But in startups, the ROE has to be much higher than 8% or you are way better off just getting a J.O.B.: less hassle, less risk, less work.
My Dad told me that in land development you need to aim for a 100% ROE. I remember buying a site in Bells Corners (that's in Ottawa, Canada) in the 1980s for around $200,000 and selling it eight months later to a car dealership for $280,000. I thought: 'What a smart lad am I.' That is, until I called Dad and told him. He lowered the boom on me and gave me the RULE. He said: "Son, if you don't aim for 100% in this (risky) business, you will go out of business. Land development is a lumpy business and it is a long way between oases." Of course, he was right.
More about Self Capitalization
What is the Value of Lunar Real Estate?
New Form of Online Payment Gets Traction due to Bootstrap Capital
Differentiated Value and Bootstrap Startup Success
More Sources of Bootstrap Capital
Ten Reasons Not To Use Venture Capital
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