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Thinking Like An Entrepreneur

Thinking Like An Entrepreneur
Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


Financing Ventures with Credit Cards, Bank Debt, or Retirement Funds

  Banks of course, don't like financing new ventures. Why should they? If the venture starts to fail, the risk of default is high. But, if the company is successful, what's in it for the bank? Not a lot. The only rational way to finance high-risk ventures is via your own money or equity financing from people who know the venture is risky, but are willing to take the gamble for a possibly large return.

  I have heard of independent films being financed via credit cards and succeeding. But, credit card financing a new and high-risk venture seems utterly foolish. Sure, some did it and it worked. But, what about those who try it and do fail? (Business failure does happen!) Do you really want ongoing large credit card bills, where you are paying a rather high interest rate? It could take you a very long time (if not the rest of your life!) to pay them off. I'd pass on that option.

  Dipping into retirement savings is an option, but I believe, if you do fail, any retirement money you have (say in an IRA) cannot be attached by creditors. Why eat dog food in old age? Leave yourself something in reserve. But, if you are young and entrepreneurially minded, then I would give some serious thought before I started stashing all my money in deferred retirement plans. Maybe, just maybe, you can find a better use for the money within your own company.

  Bank financing can also be a double-edged sword. A turnaround company I invested in a while back (Tiphook plc) was a struggling container company (if you drive by a railroad, you will see examples of the container railroad cars. Think big shoe boxes.) It seemed like a viable turnaround to invest in. They had expanded rapidly and taken on a lot of debt. Then the European recession (or maybe just a lack of interest in shipping) hit and they struggled. Suddenly, I learn that they sold off the most valuable part of their company at a bargain basement rate to a competitor. Hard to turnaround when you sell off 80% of your earnings capacity! It was a silly move, and I imagine that the only reason they did it is that the banks they owed money to panicked and suddenly wanted their money back. Even having bank debt can be a real problem if it is callable, or comes due during a troubled time.

  Another company, a nut and bolt manufacturer, was really struggling. The bank was really obliging and let payments slide. The bank made major concessions. I asked myself, "Gosh. What a generous bank. How can I find such a bank?"

  Only then did I realize the company had a very negative net worth. If the company ceased operations, the bank would be out everything. So I guess they figured, "why not let the payments ride!" Being at zero net worth is very dangerous to a company with bank debt! I think Donald Trump has mastered the understanding that if you can't have a very positive net worth, then a very large negative number is better than zero :)

  I don't recall where I first heard it, but someone once wrote it is like playing a game with a friend (say tennis). If you bet $10 and lose, you can pay it. Your friend expects his money. If you bet $20 billion dollars and you lose, then the bet was never taken seriously anyway. And, your friend will not expect to be repaid. (Gates, Dell, etc. not included as possible players of course)

  The best financing strategy not only gets you the money, but it also strongly puts the person giving you the money (as equity, debt, or other) on your side. Two great sources of financing that are often overlooked for a new growing business are customer financing and supplier financing. I think these are two of the best financing options for many companies and devote an entire chapter to this in my book, Thinking Like An Entrepreneur.

  In my book, I use a custom boat building company as an example of customer financing. It is better to line up the sale and get some money up front from the buyer to help finance construction rather than to just build the boat and hope it will sell. Customer financing is a way of life for many companies.

  Supplier financing is similar and in a way better. If your business prospers and grows, you will buy more and more from your suppliers. So, in a sense, they have a vested interest in seeing you succeed. People and companies like to help themselves. Of course, you will need to approach the right person in your supplier's organization.

Financing Your Small Business from our online guide to starting a small business.