Most new businesses rely on loans from banks, credit cards or venture capitalists to cover their startup time. However, borrowing money for a business as yet untested in the marketplace can be both tricky and dangerous. If you’d rather find business financing in your own pocket, here are two alternatives to going into debt before you begin making a profit:
When Margaret Miller found herself divorced and in need of more income, she decided to capitalize on her culinary skills. “I wasn’t in a position to borrow money,” Miller says. “So I just started slowly and kept on working at it.” Miller started Miss Margaret’s Cookies and Cheese Melts by baking a few dozen of her products at a time and taking them to local gourmet and gift shops for customers to test free. Known as an excellent cook in the small town of Saluda, North Carolina where she lives, Miller also baked for the town’s summer residents, many of whom placed orders for her baked goods to give as holiday gifts.
So, what were her startup costs? Aside from the filing fee charged by the state to apply for a home kitchen business, not much. Miller designed own logo and had it printed on stockers for her product bags. “I already had a cookie press, and someone lent me a sealer for the bags,” she says. “It was really easy for me.” Soon after she started, Miller’s baked goods were sold in the same markets where she had tested them, and her business was underway.
Use a Community Business Model
www.dreamstime.com is a community-based photography website that allows photographers to prosper right along with the business owners.
“Anyone can sign on free of charge and contribute photos, and if the photos are accepted, they go on sale,” says Dreamstime business manager and CFO Noelle Federico. “We have professional photographers, serious hobbyists and other people who just like to take pictures.”
Indeed, though it began in 2005 with a sale that netted the company a mere 67¢, Dreamstime now has 4,417,039 images online, 4,958,538 users, 138,466 contributing photographers and sells $10 of millions of photos per year.
Dreamstime came from an idea of Serban Enache and Dragos Jianu, two Romanian Web designers who were experiencing difficulty in finding the high quality stock photography they wanted to use for websites they were designing for an American named Jeff Prescott.
Being short of money and extremely adverse to borrowing any, they decided to build a community-based photography library by asking photographers to submit their best photos for consideration for a new website. The three then decided to turn the website into a separate stock photography business. The company is now the only large photo agency that is privately owned, all the other large agencies having been bought as subsidiaries or gone public.
“Any good business is created to fill a need,” says Federico. “Serban and Dragos found a lack of good photography for design purposes and filled that need.”
Dreamstime acts as the sales vehicle, taking the larger share of the sales while the photographers receive a commission. “We have quite a lot of photographer contributors who are actually earning a living on Dreamstime doing what they love,” Federico says.
Everyone involved in Dreamstime agreed they would not take out any loans. “I’ve seen a lot of small businesses get in trouble taking out loans,” says Federico, adding that many novice business people mistakenly seek capitalization before they have tested and worked their business plan. “They are trading off of someone else’s money and usually think there’s something there as a cushion. If you don’t have that cushion, you approach things very differently.”
“If you don’t have much money in the bank, you’d better be doing something that’s going to make money,” she says. “You’d better be sure that every step you take is going to give you a return on your investment of time and energy.”
Federico has been an entrepreneur since she was 14 years old and started a housecleaning business called Coverall Cleaners. Her first customers were friends of her mother’s, also an entrepreneur, who had her own graphics business and designed business cards for her daughter. She started me working in her office when I was five or six, folding brochures and putting stamps on envelopes. “We’re Italian,” says Federico. “I learned how to work hard from an early age, and I learned not to borrow money because my mother never took loans for her businesses.”
“I think it’s really important, when you come up with an idea for a new business, to realize that you don’t necessarily need funding,” Federico observes. “Just because you don’t have a venture capitalist behind you doesn’t mean your idea has no merit or that you’re not going to be able to do what you need to do.”
“If we can do anything to inspire other people, it would be to let them know that you can simply have an idea and work it with what you have and grow it into a business that employs other people and makes a positive difference in the community.”
“Business schools teach that you’ve got to have a plan, and that’s all well and good,” says Federico. “But you don’t have to have a huge amount in the bank to make your business plan into reality. You do, however, have to know how to hustle and how to execute results.”
Federico, who occasionally teaches branding classes for small business people, says she frequently encounters folks who have a lot of excuses about why their businesses aren’t successful. “If you know you have to make something happen by a certain date, you do whatever it takes to make that a reality,” she says. “My solution, if you need more money, is to figure out how to create a new revenue stream,” noting that Dreamstime has never spent more than it had in the bank and has always made whatever it needed to spend fit into its budget.
“Dreamstime is debt-free and we’ve never taken a loan, and that’s huge,” she says.
Article written by Julie Crawshaw