Committing Your Nickel To Build Your Small Business

In 1984, at the age of 33, I accepted a buy-out package from AT&T and jumped feet first into my first full-time entrepreneurial venture with a business partner, Clare Wherley. At the same time, I confronted an all-too-common reality for entrepreneurs: that I would have to commit my own nickel—indeed, many, many nickels—to the building of the company.

While it is always preferable for entrepreneurs to use other people's money—resources from relatives, friends, or best of all, a bank—getting outside funding is difficult during the early years of any business. In a service business such as our financial-planning firm, it is virtually impossible. That is because banks, for one, demand tangible assets or evidence of significant revenue to secure a loan.

In short, entrepreneurs learn a hard lesson early on: that their personal finances are inextricably bound up with their businesses. And the hardest part of the lesson is the initiation rite: the fact that they must, more often than not, use their own money to fund both business and personal needs for at least three years, if not much longer.

It wasn't until 1991, six years after Clare and I launched Lassus Wherley & Associates, P.C., that we achieved the critical milestone of a bank credit line. In the early years, we had to focus on not only covering business expenses, but also keeping a roof over our heads and eating, which we are very fond of doing. What follows is a discussion of our strategy, as well as tips for other entrepreneurs.

Committing Assets, Conserving Cash
Like most entrepreneurs, Clare and I were too optimistic about our ability to generate enough revenue in the early years to support a growing business's cash-flow appetite. Unlike many professionals who may leave an employer with a client or two—and thus some revenue—we had no clients. Indeed, I spent the bulk of the first year earning my certified financial planner designation.

We did, however, have expenses. A computer system and related equipment were essential right from the start. After three years in a home-based office, we needed to put down rental deposits for office space. As our revenue increased to $70,000 in the third year from $10,000 in the first, we had to meet an annual payroll of $60,000 for three part-time employees.

So how did we manage? Simply, we built up our assets. And, as two single women, we utilized every money-saving device we could find. My buy-out package from AT&T included a year's salary, which was paid over two years. I sold my home and moved into Clare's, adding to my reserves and paring housing costs. Clare, who had been my boss at AT&T during the Olympics project in Los Angeles in 1984, stayed employed for two years to keep money coming in while we nurtured the business. In 1987, she sought and received a buy out.

We used personal savings and after-tax dollars from retirement accounts for equipment purchases, deposits on rent, and ultimately, to meet expenses in slow periods. We frequently bought on time and slowed down payments. We paid vendors when money became available. Partial payments were commonplace, and we even asked employees to hold paychecks if cash was not available. And, of course, there were times when we wrote checks to the company instead of the other way around.

Using Credit Judiciously
We also used $50,000 on an equity line on Clare's house to finance the bulk of the equipment, our biggest single purchase. This less-expensive debt helped us reduce the cost of borrowing for several years.

Finally, the dollars of last resort, which we did resort to...the almighty credit card. With rates so high, in the 18 percent to 22 percent range, this type of debt was very painful to use. But like many entrepreneurs, we knew we could make our business work, and we were willing to risk everything to do it.

Credit cards got us past the last hurdle, as we reached the point at which I got to use my favorite words—positive cash flow. We used the cards to make purchases and make the payroll. To ease the pain, we moved to low-interest rate cards as they came available and made use of the grace periods. We never topped $25,000, the far side of our personal comfort level. And when the business finally qualified for a credit line, paying off credit cards became the first priority.

By the early 1990s, we felt the business was generating enough revenue to qualify for a credit line to level out our cash flow. We had developed a relationship with a woman executive at CoreStates NJ National Bank through the National Association of Women Business Owners, or NAWBO. When we were ready to apply, we approached her. She personally came with the loan officer to help us determine whether we could qualify. We were prepared with a stack of data a foot high. About an hour into our presentation, the bank executive said, "This is far more information than we really need. This is a done deal. I'm just here to wrap it up."

With those words—the sweetest we've ever heard—we realized we had arrived! With our shiny new $50,000 bank credit line, at a reasonable 11 percent, we were finally freed from having to dig continually into our own pockets.

Assessing the Odds
For those of you who still aren't free, consider the following two guidelines for the sane spending of a precious resource—your own nickels—on a business venture.

Your assets.
How much should you commit? The guideline: It depends. If you're worth $100,000, you'll probably have to commit most of your assets. Otherwise, you won't have a realistic chance of making a go of the business. If you're worth a half million, you can easily agree with yourself to commit a lot less.

Your capacity for debt.
How much should you borrow? Entrepreneurs, by definition, have boundless faith in their ideas and an enormous capacity for risk. They tend to keep borrowing even as it becomes unlikely that the corner will be turned. Stick, instead, to the guideline: Borrow no more than what you can repay in five years earning a salary. That's just in case your business folds, and you're left with having to take a job.
With these two guidelines as your backdrop, you might also consider this checklist of specifics:

• When starting out, have a realistic plan to keep a roof over your head and to eat. You might also, if you can, take the next step of setting aside some funds that won't ever be used for the business. Pre-tax retirement dollars come immediately to mind, because of the tax consequences and heavy penalties associated with early withdrawals.
  

• Make sure you have credit cards available, preferably with high limits and low interest rates—just in case. It is much easier to get credit before you need it. Plan not to use it unless you absolutely have to, and pay it down quickly.
  

• Set aside your own savings, outside of pre-tax retirement accounts, to be used as collateral for early loans. The banks will probably put a lien on this resource, but will remove the lien as your payment history demonstrates credibility. Even with the lien, you're better off using their money than yours.
  

• Be aggressive about building a relationship with a banker. Your goal is to move to bank credit as soon as possible. It's tougher these days with continual bank buy-outs. But always focus on the relationship. It counts more than the business plan.
  

• Go to the bank for money before you go through your own funds. Although $10,000 equipment loans from many sources and $25,000 credit-card lines are more available than a decade ago, it is still tough to get a line of credit from a bank. Note: Women can get bank credit more easily today, even though they'll still have to be aggressive. Bankers are beginning to realize that women are more likely than men to repay borrowed money, even in the case of failure.

Finally, recognize that you can't finance a fast-growing business on current cash flow. Using other people's money—and because that usually isn't possible in the beginning, dipping into your own—is the only way to grow! So get out there and contribute to America's economy. Spend those nickels. Borrow, grow, and succeed!

This article was provided by the Ewing Marion Kauffman Foundation through its small business Web site www.entreworld.org. EntreWorld is an online information resource for entrepreneurs and supporters of entrepreneurship. EntreWorld provides a solution to information overload on the Web by providing highly filtered information coded by stage of business development.