A few years ago, I read an article that stated the average cost of starting a small business in the US was a whopping $67,000. And even then, I thought it was underestimated.
Now, you may be looking at this number and thinking, “Hey, if it really costs that much, I’m out! I’m having trouble just scraping together $500, and I don’t want to join an MLM. I want to ___fill-in-the-blank__________. If it costs $67,000, I’m dead in the water. I’ll spend the rest of my life in a cube farm or driving a delivery truck! I thought this was the land of opportunity.”
I get it.
But before you throw away your dream of being your own boss and building something you love, consider this.
Despite what the money lenders would have us believe, we don’t need a wheelbarrow full of cash upfront to take the first step.
Nor do we need to take out a line of credit on our homes or apply for a dozen different credit cards or borrow our parents’ lifesavings.
What we do need is a clear understanding of which method or methods we intend to use to build our dream:
Beginning a new venture doesn’t mean you need to focus on developing and growing your company to the exclusion of everything else.
If you can, that’s great. But most of us have obligations and can’t afford to throw all our time, focus, energy and funds into something unproven.
It’s easy to get carried away with the dream of owning your own business and to quit your job prematurely because you can’t stand to work for someone else one more day.
But that move puts incredible pressure on you to produce sales before the money runs out.
What happens if your ramp time is longer than you anticipated?
Or worse, what happens if your idea turns out not to be the next best thing?
You end up with a pile of debt and no way to pay it back.
|A better way to start may be to straddle your way into your dream – work your new business on the side until you’re earning enough to safely move out of your day job.|
When you think you’re ready to make the leap to fulltime entrepreneur, you’ll want to look carefully at a couple of things before you make the move:
1) What is the amount of money you can safely take out of the new business to fund your personal expenses without strangling your company’s growth? and
2) What are the different ways your current job may be subsidizing your new business?
Doing the math to determine when your new venture should be able to support your lifestyle completely will give you a target date to shoot for.
But in doing that calculation, we often forget the many ways our day job subsidizes that lifestyle.
Let’s say, for example, that you work in a corporation where you have access to a variety of software packages that you’ve been experimenting with on your lunch break.
When you leave, you need to factor in purchasing the software you want to use.
If the licenses are expensive, you may need to work a little longer before you make the move.
The same goes for companies where you enjoy health benefits and profit sharing plans.
When you move, you’ll need to fund your own health insurance premiums and retirement program. This may be more expensive than you think.
I have friends who straddle just for the benefits alone.
If you don’t have the luxury of working a current job while you plan your new business, being careful about the amount of debt you take on, and what you spend your money on, becomes even more critical.
You may need to put your dream on hold while you find a new day job, then work your new business on the side like other Straddlers do.
When I founded one of our businesses in 2005, I no longer had a day job; so straddling wasn’t an option. I started, like many of you, with a laptop, a cell phone and a desk in a home office.
And, like many of you, I needed everything at once – an LLC, client management software, branding, equipment, an office phone with conferencing ability (cell phones weren’t that smart back then) and much more. I also needed professional help for invoicing and bookkeeping.
My husband was working as a new realtor and his startup was slow, so money was tight.
And, for a variety of reasons, we had decided to bootstrap the business; that is, we decided to fund the startup out of our own pockets.
The best decision I made was to treat our service like a product – the client’s credit card was billed when the work started, not after the result was delivered.
|The most important thing to any entrepreneur is cashflow|
and this approach gave me the cashflow needed to do the work and to purchase the infrastructure we needed, step by step, without running up huge credit card bills.
In many businesses you can ask for payment or partial payment upfront.
Most entrepreneurs are used to paying independent contractors on a payment schedule, including a fee at the beginning.
This kind of payment system will keep you from having to load up your credit cards in the hope of paying them off each month, and it will protect you in the event the client cancels after the work is started.
Some large expenses are unavoidable, however. When you hire someone to work with you in your office – even a home office – they need a place to sit, basic equipment, and a place to store lunch items.
If you’ve been used to taking the cash you don’t need to run the day-to-day operations and putting it aside, you’ll have the money you need to invest in the items above.
If you’re not at that point yet, it will be tempting to buy everything on a credit card.
Before you do that, spend time figuring out how you’ll pay it off.
Once you start using a credit card to buy what you think you need, it’s easy to keep adding items you absolutely have to have without thinking about what you can actually afford.
A secondhand desk and chair borrowed from a friend, a repurposed computer, and no debt will work just fine.
|In the beginning, “make do” is a powerful mantra.|
From early on, both my husband and I worked in our business, so there was no cushion for us when the downturn arrived. Over the course of a year we had to lay off over a third of our staff, move out of our outside offices, and transfer the business back to our home.
What helped us survive – apart from working long hours – was automating more and more of the business to reduce the amount of labor required.
What also helped was keeping a strict eye on everything we purchased – right down to how many paperclips we bought.
In the long run, tightening the strap and continuing to fund as much as we could from our reduced income paid off.
Sometimes, however, entrepreneurs will use credit cards to avoid making painful changes.
They will fill up one credit card, then start another, and another until servicing the debt takes up most of the income.
Rebecca Wessell, in her article for StartUpNation, calls this Debt Stacking.
Debt stacking is a fast and easy way to kill your business. At some point, after paying credit card bills, you’re left with no money for marketing, advertising, hiring, or anything else.
And, something that most new entrepreneurs forget, if your business is new and does not have a track record of producing profits over several years, those credit cards come with a personal guarantee.
|So even if you declare bankruptcy in the business because the debt is so high, you personally still must pay off those cards.|
If you have good credit, it’s common for some credit card companies and banks to offer you business loans shortly after you sign up for a credit card.
Some entrepreneurs see this as an easy way to avoid using credit cards to fund projects.
However, unless you have a definite plan on how you would use the money to grow the business, and how you would pay it back, it may be better to walk on by.
Business loans work best when you are at a point where you know you can expand the business profitably, you just don’t have the funds to do it.
Let’s say you have a proven model – setting up small homes to care for a dozen seniors. You have two homes running and a waiting list of 30 people.
You find a property that would be perfect for 20 seniors. You have the down payment, but that wouldn’t leave you with any money to remodel and furnish the property. You still need another $100,000.
Since you have a proven track record and a waiting list, this is a good time to investigate a small business loan.
Sometimes entrepreneurs are desperate for cash or help, and they believe the way out of their dilemma is to offer a piece of their business to a friend or colleague.
While this may produce a short-term win, it comes at a high price – loss of control.
Several years ago, my sister-in-law and her husband started a consulting business. To get things off the ground, they brought in an investor for 10% of the company.
For many years the business was very successful.
When they reached a point where they wanted to sell the business, everything was set except for one thing – their investor refused to sell; and there was no way they could persuade him.
The opportunity was lost and never returned.
Needless to say, they wished they had bootstrapped the company completely on their own.
Does this mean you should never have a partnership?
My husband and I have had a very successful partnership with our friend and CPA since 2005.
Just be aware that most partnerships fail; and what was once a great friendship can dissolve into a nightmare.
I believe good partnerships are founded in the beginning, with
1) A clear determination of roles and responsibilities
2) A well-crafted partnership agreement
3) Discipline to stay out of each other’s area of expertise
4) Unwavering respect for the people you partner with
And a good partnership may help you avoid having to take on investors.
Determining the best way to fund your new business will depend on several factors, such as:
• What business are you starting?
• Can you straddle while you build?
• Is there a large upfront payment or can you build step by step?
• Can you do this business yourself or do you really need help?
• Is partnering with someone better than hiring help?
• Will a partner bring in resources so you can avoid investors?
• Have you done this business before or is this a new idea?
• What equipment and resources do you absolutely need?
• Can you borrow, lease or rent the equipment rather than buy?
• Can you use independent contractors or does your business really need employees?
• What do you project your sales, expenses and cashflow will look like in your first year or two?
Walking through these questions and others thoughtfully, especially the last one, will help you come to a decision.
Just remember, each strategy has a downside as well as an upside, so choose carefully. What you decide will mean failure or success for your new venture.
Here’s to your success.