Invest In My Idea

There is much to buy when starting a business: fixtures, equipment, supplies, and inventory to name just a few. All of these things cost money; money that you may not have. Even so, using some creative tricks, you too can set up a business on a shoestring.

The Story of Johnny’s Antiques

 It might help to know the story of John, an antiques lover who started what would become a very successful antiques and collectibles shop without a lot of money in Sacramento, California. From the start, John’s motto was “It’s all in the buying.” John knew that the trick to a successful bootstrapping business was to pay as little as possible for what he needed. Here’s how John succeeded:

• His first “store” (if you could call it that), was merely some space that he sublet above a friend’s established antique dealership. When people would come into the main store, a large sign would encourage them to continue browsing upstairs at Johnny’s Antiques.
• He scowered flea markets and garage sales every weekend, looking for bargains. “It’s all in the buying,” he would always tell me. If he could buy a good piece at a bargain, he knew he would be able to sell it for a profit.
• He bartered for fixtures and shelving.
• He took almost anything he could on consignment, thereby stocking his shelves almost instantly.
• He advertised in inexpensive, offbeat publications.

Most of all, John had the right attitude: he refused to pay too much, was frugal with his money, and always shopped for better bargains. If you are going to bootstrap your business, you must do the same. Be stingy, don’t blow your money on high rent and fixtures, and, overall, keep your overhead low. Adopt the attitude.

Don’t Blow Your Dough on Rent

In order to start your business on a budget, every dollar you have must be preserved and spent on only the most necessary items. As rent is often one of the biggest expenses a business has, it follows that you will be better able to start your business if you don’t spend a lot of money on rent. If you do not need a highprofile location, don’t get one. Start small, pick an inexpensive location, and move on to better digs after you are established. An even better option, as discussed in Chapter 2, is to start your business out of your home, if at all possible.

Another lowcost option is to start your business in a business incubator. The purpose of a business incubator, as the name suggests, is to foster and launch new business ventures and increase chances of success by providing lowcost space, overhead, administrative services, equipment, and expertise. Run as nonprofit organizations, business incubators are usually started and funded by governments, universities, or other groups that are interested in job creation and community economic development. Business incubators began in the 1970s and there now are more than 700 in the United States.

The difference between an incubator and shared space is that those who run incubators are dedicated to helping the businesses housed there succeed through inhouse management, as well as financial and business consulting. If you are lucky enough to get your venture housed in a business incubator, be ready to get an informal MBA in the process. You will likely learn more about business than you thought possible.

While all business incubators have the same goal in mind—helping to launch successful businesses—each is unique in its own way because many incubators specialize. In the Silicon Valley, for example, you might find a business incubator that fosters hightech businesses; in Iowa, the incubator may be farming oriented. It all depends upon the nature of the region and the mission of the particular incubator.

The bad news about business incubators is twofold. First, not all incubators are created equal. Some are more successful at accomplishing their goals than others. Second, even if you are not in the best of incubators, you will nevertheless get spoiled. Subsidized rent, camaraderie, and free help are hard to beat. But because the point of a business incubator is to launch new businesses, you will have to move sooner rather than later in order to make room for the next bootstrapping entrepreneur.

Berry Gordy was born in 1929 in a Detroit ghetto, one of eight children. His first business venture was a jazz record shop that went bust before too long. Although music was his love, his need to eat found him working on the assembly line at the Ford Motor Company when he was in his early 20s. In his spare time, Gordy made music. Although he was able to move to New York, and wrote a gold record song (“Lonely Teardrops”), Berry Gordy again found himself in Detroit by the late 1950s.

Gordy had learned that if he was going to succeed in the music business, he would need to produce his own records. He borrowed $700 from his sister and set up a ramshackle recording stuio in downtown Detroit. He named his company Motown Records (for the Motor Town of Detroit), and set about looking for talent.

From the beginning, Gordy knew that he had to watch every penny, but his trick was that he used that to his advantage. He decided to make Motown a “family.” The singers, artists, songwriters, and producers all lived together and worked together in that studio, creating a special bond (and saving a lot of money). Before long, Berry Gordy had discovered and signed Smokey Robinson, and soon after that, Diana Ross and the Supremes, Marvin Gaye, and Stevie Wonder.

• Reduced rent (on average, business incubators charge 25 to 50 percent less than normal rents)
• Shared services and equipment
• Access to financial and business acumen
• Great contacts
• Legitimacy (which can go a long way when looking to lure investors)
• Low overhead

You can learn more and find out what types of incubators are in your area by contacting the National Business Incubation Association at 6145934331, or by going to <www.nbia.org>.

Fixtures and Equipment

You do not need new fixtures or new equipment. Your business may look a bit nicer and cleaner, but when you are on a budget (and often, even when you are not), it simply is not worth the extra expense. Buying used can save you a lot of money, and it’s even possible to get these things without paying anything up front by searching in the following places:

• The Yellow Pages. You will find several businesses that sell used fixtures and equipment. When companies remodel or go out of business, used equipment stores buy fixtures and equipment and, as they say, pass the savings on to you. These places usually have tons of used furniture, fixtures, display cabinets, and other items that you may need to set up your business.
• The Internet. One place to start is eBay, but there are also many other online auction houses, used business furnishings sites, and wholesale distributors that can help you equip your store for a bargain.
• The classified ads. Used business equipment is a staple of the classifieds. You may even want to place your own ad under “Equipment Needed.” Similarly, the back of trade magazines often have used equipment for sale.
• Auctions. Out of business companies furnish much of the merchandise commercial auction houses offer. Find some auctions in your area and see if you don’t find equipment similar to what you need for less than half of what you would pay for it new.

Beyond bargain prices, it should also help to know that much of this equipment can be financed, thus preserving your precious startup capital for other needs. Banks can sometimes finance 100 percent of used equipment, using the equipment as the collateral.

Moreover, even if you can’t find what you need used, many new fixture manufacturers will finance up to 90 percent of your purchase, which again preserves your capital. The problem with this option, though, is that, like a car, new equipment loses its value quickly, and the finance charges manufacturers offer are sometimes significant.

Another option is to see if your suppliers or manufacturers would be willing to help you purchase the equipment necessary to supply their goods, or at least finance part of the purchase. You can sweeten the pot by offering to let the manufacturer or distributor hold title to the equipment, thus giving them a security interest that protects them financially.

Consider, too, the option of leasing any fixtures or equipment you might need. Chapter 13 can give you some ideas about how to do that.

Stocking the Shelves

If you are starting a retail store on a shoestring, you need to understand two things. First, your shelves must be full of enough inventory to turn a profit from the moment you open your doors; nothing looks worse, or is a better recipe for disaster, than a store without enough merchandise. Second, it is possible to stock those shelves with plenty of products without paying for it all up front.

How much merchandise is enough? Well, it depends on how much product you need to move every day to turn a profit. Your business plan should be the place to turn to find this critical number.

Here’s another example. In his great book, Starting on a Shoestring (from which several of the ideas in this section come), author Arnold Goldstein explains how he opened his first store, DiscountCity, with $120,000 worth of merchandise. Goldstein writes that that number did not come out of thin air. He let the numbers do the talking. Here’s how he came to that conclusion:

• He wanted to make 25 percent profit, so adding that into what he needed to pay his creditors and other bills, Goldstein concluded that he would need $900,000 in sales the first year.
• He determined that the cost for products that would sell for $900,000 was $675,000, so he knew how much it would cost him to buy his inventory for the whole year.
• He also realized that he would likely turn over his stock 5.5 times in the first year, which meant that his opening day inventory would have to be $120,000.

Thus, he learned that $120,000 worth of product turned over 5.5 times would mean that his inventory costs for the first year would be $675,000; this amount would bring in retail sales of $900,000, with which he could pay everybody what he promised and make 25 percent profit. It’s all in the numbers.

So where do you get this merchandise when you don’t have a big budget? You have to be willing to look, often long and hard, for suppliers who will give you their products on credit. There are tens of thousands of wholesale product suppliers and distributors vying for a chance to sell their wares in your store. Your mission is to find those that will stock your shelves without requiring an upfront payment for the goods. You do so by having them extend you the goods on credit.

Here’s how: When speaking with the different salespeople who will be selling you their company’s goods, you must make a great impression. If you are not incorporated, you should be. Have a great business plan, a lawyer, business cards, purchase orders printed with your business name, stationery, a location (this is especially important as the supplier will want to see what you have in mind and how good the location is), a banker, and so on. Anything that gives you legitimacy helps your cause.

The salesperson in turn will try to sell you to the company’s credit manager. If you have a decent credit rating and some credit references, the chances that the company may say yes increase dramatically. It might take many suppliers who are willing to give you a small amount of credit to fill the store, but who cares? The idea is to get the shelves stocked, and when you are balancing on a shoestring, you have to do whatever it takes.

It also is not impossible to get one large supplier to supply a great percentage of your initial stock—sometimes even 100 percent of your initial inventory. Hardware suppliers do it for hardware stores, liquor wholesalers do it, as do food wholesalers and clothing manufacturers.

■ Finding a Supplier

• Begin by speaking with people already in the line of business you want to start and find out who their suppliers are. Also, look in trade publications to get additional names. Make a list of every possible prospect.
• Put together a great package that will woo suppliers. It should include your business plan, a picture of the location, letters of reference, contact names of your professional advisors, even tax returns. Explain in your proposal exactly what it is you need, how much credit you are asking for, the terms you want, and how you will be paying it back. You need a package that will make a reasonable supplier conclude that you are likely to become a potential new client who will be buying their goods for many years to come.
• Call up suppliers and make appointments with the salespeople in your area. Present the package to them. Ask them to set up an appointment with their company’s credit manager or regional sales manager.
• To sweeten the pot, explain that you will agree to continue to buy from them for the term of the loan (but do not agree to use them exclusively), and agree that the supplier will have a “security interest” in the merchandise. This means that if you default or go bankrupt, they will have first dibs on the property.