There has never been a better time to start a business than right now. To help revive our nation's economy, one of the most patriotic acts you can do is to create a job for yourself -- and eventually for others too.
Many Americans have big dreams, but they don't have a lot of money to finance those dreams. I'm going to tell you how to start a viable business without big-time investors and a lot of seed money. Here's how I gathered the financial resources to get my company, Tweezerman, the global beauty tools company, off the ground. These lessons apply to every small business person with a dream and the will to make it happen.
Put your money where your mouth is.
How much do you believe in your idea? Make sure your business idea is so compelling and that you are so confident about your skill in executing it that you are willing to personally guarantee any loans you make. Your own money or money you can easily get -- that's where you need to begin if your intent is to build a company you own and control.
Be unwavering in your commitment to avoid spending money when you start. Don't hire consultants, rent office space, buy new equipment, or spend any money you don't absolutely have to spend. Always ask the price of things before you buy them, and then ask for a better price. If you don't spend it, you don't have to raise it.
Start with money you have.
I was once told by a potential investor in one of my projects, who got annoyed with my badgering of him for money, "Go find something you can do with the money you have." At the time I didn't realize what good advice this really was. I started Tweezerman with all the money I had at the time, which was $500. I operated out of a 400-square-foot bungalow that was my office, warehouse, and home. I used free, recycled, and reused equipment and supplies, and sold the tweezers myself at first.
Borrow, but borrow smart.
When my company started to grow, I borrowed money from my father, then from friends, and then started using credit cards from there. I recommend that you start building your company with borrowed money rather than investors' money. Why? Because otherwise you're giving away too big a share of your business to an investor. What an investor will pay for a piece of your company is dramatically more when it's a proven entity than when it's merely your good idea. Once your company gets big, you won't have trouble attracting investors. I advise that you stay away from them in the beginning, however.
Two rules of thumb for borrowing smart.
First, everyone gets a legal document, whether it's your Aunt Betsy or a business associate. No handshake agreements. Whatever agreement you make at the outset -- interest rates, repayment schedules, stock options -- put it all in writing and have both parties sign it. And second -- very important -- stick to your agreement. Make all payments on time. My father told me, "Always pay your bills on time -- not a day early or a day late." Keeping your agreements builds your reputation and builds good business habits.
Build your credit.
Back in the 1980s, credit card interest rates were at 18 percent, and I was getting new card offers practically once a week. I acquired 45 credit cards and $185,000 of credit card debt before I convinced Chase Manhattan Bank to lend me money to pay off the cards. But because I had paid every card on time every month, sometimes with a new card that arrived in the mail, I had terrific credit and Chase was willing to back my enterprise. Good credit is something every new businessperson can easily achieve and maintain. On the other hand, it's very difficult to get it back once you've blown it.
Offer your lenders convertible debt.
Still trying to avoid giving away equity for the money I needed to grow, I financed Tweezerman by offering convertible debt to family, friends, and business associates. Here's how it worked. I borrowed money from people and subordinated their notes to the bank. (Translation: I had them sign a note saying that the bank always gets paid first.) Obviously, banks look upon such agreements favorably, and it assured I could always get a traditional bank loan. I paid my personal lenders 8 percent interest a year, making semi-annual payments -- always on time. I gave my circle of lenders the right to convert the note to stock at the end of the year at a predetermined conversion rate.
I set up the loan-to-stock-conversion rate by estimating what the company would be worth in two years. I reasoned that as long as Tweezerman was earning 10 percent profits on sales, the company would be worth whatever one year's sales were. Then to keep things simple, I authorized one million shares of stock. This way, anyone who owned stock could figure out what a share was worth. If our sales were 2.2 million dollars, each of the one million shares of stock was worth $2.20.
Your vendors could help you finance your growth.
Meanwhile, I was also raising money from my vendors by convincing them to give me extended payment terms. The times when I was late paying them, I voluntarily paid them the same amount of interest on the past due amount that I was paying for my bank loan. At first my foreign vendors wanted me to pay for my tweezers before they shipped them. Eventually, however, I got most of them to hold my invoices 90 days. Managing cash flow like this is akin to getting short-term loans.
In addition to being reliable and offering my vendors a financial incentive for letting me get my inventory on credit, I made sure to spend face time with them so I was more than a name on a contract. I visited these vendors once a year until we had such a good relationship we could do business by phone.
Be "accountable" to keep your bank and backers happy.
Every month, without missing a month during those early years, I prepared a management income statement and balance sheet and sent it out to my bank, convertible note holders, and anyone who I thought might one day be interested in investing. We also gave the bank projections, which were always conservative, and met them every year. If something went wrong, we notified the bank immediately. My banker came to trust us and over the years extended more and more credit to us. Initiating this kind of up-front communication created an excellent, if not old-fashioned, relationship with my banker. It also gave the convertible note holders a sense that they were involved in a thriving and growing company.
Don't stick your stockholders with the tax bill.
The company's sales and profits grew steadily. Not surprisingly, most of my convertible note holders eventually converted their notes into stock. To avoid double taxing (taxes on the corporation coupled with taxes on the people who get dividends from the corporation) the company was organized as a Subchapter S Corporation. The shareholders directly pay their share of the taxes on the profits the company makes. I always distributed 50 percent of the profits to my shareholders so they could pay their taxes. This is a requirement I now insist on if I invest in a company. It's surprising how many similar companies don't do that.
Don't pocket the cash.
I always deposited all the money I got from selling our products, including the cash we got when we did the international beauty shows. I remember when my bank made its first loan to me, and I asked them, "Why now?" The loan officer said, "Besides the fact that we know you are in control of your business -- those monthly statements -- we know you are honest." He said he knew that because they saw me depositing lots of cash, not hiding cash sales, even though mine was not a typical cash-based business.
Be responsible and the money will flow.
As Tweezerman grew, we began to get very large orders from the chain drug stores. Suddenly, I needed a quick and large cash infusion to make such a large opening order. Where did I find this money? It was right under my own roof. I took out an equity line on my house. My bank trusted me, so I had no problem getting the additional mortgage. My personal guarantee was on all the bank loans and the convertible notes. I always paid my interest on time or my notes when they became due -- even if I had to borrow from someone else to do it. In short, I was super responsible to those who backed my company. In the end, we all benefited from this positive character trait.
You can't live without food and water. Likewise, you can't start or run a business without money. But it's a myth that you need a lot of money to launch your own business. What you do need is a good idea, the talent and drive to make it happen, and good character. Good character is the part that will help you raise money, establish essential relationships with your backers, and help you finance your dream. Read more about financing your business in my book Raising Eyebrows. A Failed Entrepreneur Finally Gets It Right.
Follow Dal LaMagna on Twitter: www.twitter.com/DalLaMagna