Starting a business – Step 4 (money)

Our first three steps to starting a business involve a lot of prep work–getting advice, input, and making a plan. The fourth step–ensuring you have the capital you need to be successful–is part of those first three steps, but we’ll call it out specifically here. I’ll offer six pieces of advice with respect to capital.

The Lean Startup1. Start as lean as possible – Entrepreneur and investor Mark Cuban said in a 2013 Bloomberg interview that only morons start a business on a loan. His point – you have so much uncertainty, keep costs to a minimum, and many businesses don’t need to be particularly capital intensive to start. I like the fact that in that interview he stresses the value of doing your homework (Steps 1-3.) This is good advice. It also ties into the fail fast, fail cheap mantra, which isn’t so much about failing as about continuing to evolve your product or service to better meet customer needs and wants, because an entrepreneur can’t know everything out of the gate. New businesses shouldn’t, as a general rule, buy buildings, equipment or other expensive means of production. They should lease and rent whatever fixed assets they can in the beginning. Again, this is a general rule.

2. Match sources and uses – if you have to invest in fixed assets (physical assets whose life is longer than a year), then make sure that you obtain longer-term financing. I’ve seen businesses invest all of their cash or borrow on credit cards to invest in fixed assets, and then they don’t have the money needed for working capital. Matching sources and uses simply means matching the terms of financing to the life of the asset. This means generally if a piece of equipment has a seven year useful life, then it should be financed with a seven-year loan not with an annually renewing line of credit.

3. Shore up your working capital – a number of businesses fail because they did not plan adequately for enough working capital. As Lahle Wolf  says, “Working capital is the amount of liquid assets (in cash or accessible as cash) to run and grow your business. Start-up capital (which serves as working capital) should cover business expenses for at least one year or until the business is able to generate enough revenue to sustain itself.” Many entrepreneurs underestimate the amount needed.

4. Talk to your local banks – local banks, or banks with a presence or representative in your market, can help with financial planning and provide advice on how best to meet your financial needs. Remember to do your homework first (Steps 1 to 3) and make sure you are starting as lean as possible before going to the bank. Have the SBDC (see Step 1) review your business plan (Step 3) to determine if it’s ready for a bank. The point here is, you can approach the banks before you know exactly what you need/want, but you should know and have vetted (checked out by others) before going in. Great local banks in this market include (but are not limited to) Old Fort Bank, Fifth Third, Croghan Colonial Bank, and PNC.

SBA 7a & 5045. Take advantage of public financing programs – there are a myriad of these programs, and they certainly merit a post on their own. As with all of these and other items, please feel free to contact us at SIEDC for assistance.  Ten of the most popular include the following: SBA 504, SBA 7a, Regional 166, Collateral Enhancement Program (CEP), Ohio Capital Access Program (OCAP), local Revolving Loan Fund, Innovation Ohio Loan Fund, Targeted Investment Program, USDA Business & Industry Loan Guarantee, ECDI. A guide to what you should prepare prior to applying for an SBA loan can be found here.

MillstreamAngelClub6. Don’t discount nontraditional financing – there are several alternatives to traditional funding and FFF (friends, family and fools) for entrepreneurs to consider. Crowdfunding is becoming increasingly popular (see listing). In addition, local investment and angel groups are proliferating. For Tiffin and Seneca County, the Mill Stream Angels Group is looking at both traditional (high-tech, high-growth IT, medical, etc.) and non-traditional (food, manufacturing, etc.) businesses for investment. The CoreNetwork, founded in 2003 in Toledo, looks for high growth companies in northwest Ohio.

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