Getting back to basics: financing your small business

house made of money notes and billsYou’ve figured out that you were meant to be an entrepreneur. You’ve got a great idea for your new business. There’s just one small problem…you don’t have any money. A small business can be pricey in the beginning, especially if you manufacture or sell physical products.

Before we begin, let me make one point. If you’re launching a start-up, and need an opening budget with 7 or more figures, this is not the post for you. Venture capital isn’t a topic I know a lot about, but there are many resources out there. I started this book (pictured below), and it was really good, but it just didn’t apply to my situation. Guy talks a lot about the initial process of finding investors, so it might help you out on this path.


My one big piece of advice is this: don’t take on loans unless you absolutely have to. I have seen so many businesses fail because of their initial debt load. They “needed” to have the back rooms full of product, the best computer systems, and a huge marketing budget.

Selling or manufacturing physical products

Even if you run a product-heavy business, there are ways to reduce your initial investment.

  • Stock only what you’ll need for the next 30 days.

  • Ask your vendors about consigning their products, so you only pay for what you sold, and ship back the rest.

You won’t get the best per-unit price doing it this way, but not having a big bank loan is worth the trade-off.

Digital or service-based businesses

If you’re a smaller business, selling services or digital goods, there’s no reason to borrow large sums of money. In the beginning, run on the barest of budgets.

  • Run the business out of your home.

  • Use your current computer and a kitchen table (if you don’t have a good desk).

  • Use social media, word of mouth, and referrals to generate new business.

  • Don’t get sucked into a “I’m new, so I shouldn’t charge a lot” mentality. Don’t let “lowest price” be your unique offering…it’s a game you can’t win.

If you set your prices properly, and stick to your budget, you can fund future upgrades with your profits instead of outside help.

But…if you still need some help

So, despite everything, you just can’t avoid borrowing money. If that’s the case, you need to be really smart about how to proceed. Before you call your bank or 3rd party lender, ask these people first (and in this order).

1. Yourself – Dip into your savings, get extra shifts at your current job, take on a part time job, or sell your stuff. Nobody will give you money if you’re not confident enough in your business to make a few sacrifices

2. Family & friends – Tread carefully here. Don’t ask Uncle Jim to cash in his RRSP’s, especially if you’re unsure about the business’ future. Ask for small amounts, and be very clear that, worst case scenario, they won’t get paid back for a while (if at all). The main benefit here is the lower interest rates and more flexible repayment schedule. Chances are good your mom won’t foreclose on your house if you’re a couple months late.

3. Business partners – If you’re going into this with a partner, make sure that they’re going through Steps #1 and #2 too. It’s important at this stage to have a very clear (and legally binding) agreement in writing, to figure out how to deal with the split of profits or losses, especially if that relationship breaks down.

…and finally

If you need to find a lender, do your research. Don’t just take the first offer your bank gives you, and don’t take on more debt than you need. If you have great credit, the bank may offer to loan you more money than you need. As tempting as this is, it’s just that much more that needs to be paid back when business is slow.

Here’s the most important thing to remember. You can only pay back the money with your company’s profits, not revenue. Don’t get confused by the total amount of revenue you generate. If you sell $50,000 in products and services each month, a $5,000/month loan payment doesn’t sound unreasonable. But if you’re only making $2,500 in net profit (what’s left after ALL of the bills are paid), you’re not able to keep up with those payments.

I remember hearing about someone local, who borrowed over $100,000 to start up a small take-out restaurant. Let’s be really generous and say that he was pulling in 10% net profit each year. Unless you’re running a service business from your home, pulling any net profit in the first year is tough. Even without factoring in the interest, 100% of the profits from his first $1,000,000 of sales would go directly to the loan. With interest, it would be closer to $2,000,000, if not more.

That doesn’t allow for any surprises, like broken equipment or a slip in the economy. Given the size of my city, and the competition in his market, it will be a long time before he gets out from under that debt.

It’s much sexier to start off your new venture with a new company car and a stack of money in the bank. Unfortunately, small business is rarely sexy. It will take a lot of sacrifice, and a very patient family to support you through the hard times. But, if you can bootstrap the business, and stick to your budget, you’ll be paying cash for that company car. Your competition, who borrowed too much money, will be up at night, worried about how to make the next loan payment.