Expand to New Facility?

Our business is growing. When should we move to a new facility? How to get financing?

Our business is growing steadily. When is it right to move into a new facility? How do we find funding?

We are getting close to capacity at the kitchen we rent but we are at a point where we (2 people) might not be able to meet the new volume without a new facility and more employees. The business isn’t grossing that much yet, but won’t unless we can increase output. Asked on MosaicHub by Eric Martin

Mike’s response

How can you increase capacity without increasing overhead?

— Find an “as needed” contract kitchen for the time being. A restaurant I frequent is open for breakfast and lunch, and is going to rent out its kitchen in the evenings for people like you.

— Do a second shift. Hiring a “night crew” is a lot cheaper than opening a new facility. Utilize your existing facility and equipment to the max.

Raise your prices! If you have increasing volume and you’re not yet profitable, you’re not charging enough. Unless you can demonstrate profitable operation, you’ll never be able to raise growth capital.

Get more efficient, and thus boost your labor productivity. I have a bakery client who started tiny, and now she’s at $3 million. It has been very hard for her to make the production more efficient. “We’re an artisan bakery!” she proclaims. But now she’s getting productivity religion, and it’s going straight to the bottom line. And quality is not slipping; if anything, the greater consistency is increasing quality.

Schmooze your bankers. Everybody’s first suggestion for raising money is crowdfunding, but I doubt it could work for you. You want permanent capital–perhaps $50,000 or more. You can’t crowdfund that much. You’d spend a huge amount of time and effort, then probably not make it.

Focus on getting profitable by getting the most from your current facility, get help putting a plan together, impress your banker, and get a legitimate capital loan.

 

 

Finance Without Collateral

To borrow money without collateral, you need strong, trusting relationships. And you have a strong obligation to repay.

Q. How can I finance a small business project without collateral?  Asked on High Table by Shehzad Aman

A. Here are a few ways to finance without collateral.

1. Your savings. You should be as demanding on yourself as a banker would be to demonstrate the viability of your proposal.

2. Your family or friends. They may loan to you without collateral because they know and trust you. Your obligation to repay is even stronger than it is with a bank.

3. Crowd funding. It’s the latest rage. I have read a lot about it, but I’m not sure how successful people have been raising capital this way. Who can get it, for what amounts and purposes? What promises do they have to make?

4. Your own creditworthiness. If you have a good credit score and good relationship with your bank, you should  be able to get a non-recourse loan for several thousand dollars.

5. Charging it on your credit cards–the all-time worst way to fund a business, yet one that is used all the time.

To borrow money without collateral, you need strong and trusting relationships with people who have money.

Some may suggest venture capital. But VCs aren’t interested in “small.”

There may be business development grant or loan from a foundation or government agency, but this is not something to count on. None of my clients have ever gotten enough capital this way to start a business.

Perhaps you are being too restrictive by saying “with no collateral.” Ask yourself what kind of collateral you have. For example, if you purchase equipment, the equipment itself serves as collateral.

*   *   *   *

Shehzad, I answered this question as if you were in the U.S. But it looks like you are in India. I know nothing about the small business banking sector there. I suspect that personal relationships are even more important. But there may also be business development loans from some agency that wouldn’t be available here.

 

Raising Seed Capital or Licensing a Formula

The farther along you can develop your idea, the easier it will be to attract interest from potential backers or licensees, and the more control you’ll be able to maintain.

Question on HighTable.com from Amar S. How do we find partners to help fund and license our concept? I am part of a two physician team that has a formula for an appetite-suppressing meal replacement bar. The concept allows us to take any soup and turn it into a bar. Our initial focus will be to produce vegan/vegetarian, allergy-free, low carb, low fat, high protein and kosher bars. We have a great idea, but we are having trouble finding established companies to partner with for development.

My answer. Amar, the farther along you can develop your idea, the easier it will be to attract interest from potential backers or licensees, and the more control you’ll be able to maintain. Very few established companies are interested in helping you develop such a product from an untested idea.

You say you have a formula, a concept. If I were an investor, I would be more interested if you had produced some initial batches, conducted tests with them, and tried them out with the kinds of people who would be your consumers. What did they like and not like? If it’s for weight loss, did they have any results? What about packaging and shelf life?

As a potential investor, I would want to see what processes you used, what equipment, how it would scale up, what sets it apart from similar products. How would the production costs pencil out against the likely retail price point, after backing out all the distribution channel costs? Does it require testing and approval from any regulatory agencies? How are the processes and products protectable? Are there pieces you can patent?

Where and how would it be sold? Would it be a grocery item? Health food or natural food stores? Sold online? How would it be marketed initially?

You’ve been in a service and consulting business. Now you’re looking at a manufacturing and distribution business. It takes a different mindset and skill set. You might say, “We just want to sell or license the concept to a big player, then wash our hands of it.” But even if you find a taker, you’ll realize the least return from this approach. You’ll lose control, and somebody else will make most of the money.

I’d look for three things first:

1. Raise some seed capital to do the things I outlined above. At the earliest stage, this money usually comes from your savings, family, or a true believer. (For example, a client of mine who produces gluten-free products has been approached by a VC who has celiac disease. BUT, she has been in operation for several years, and has a track record of growth.)

2. Partner with a person experienced in taking such products to market, with operational, marketing, fund raising experience. Not that he/she is an expert in all three areas, but has been there in the trenches

3. Find an attorney who can advise you how to protect your formulations and processes through patents, trademarks, etc.

Alternatives to Bootstrap Financing

Bootstrap financing may be unavoidable initially, but it’s a huge barrier to healthy growth, and you should get outside growth capital as soon as possible.

Bootstrap financing may be unavoidable initially, but it’s a huge barrier to healthy growth, and you should get outside growth capital as soon as possible. Besides bank loans, what other sources are there?

• Borrow from yourself, even from your retirement fund. To do this, you must be as hard on yourself as any banker would be. You’ve got to demonstrate to yourself just as you would to  a banker that your business plan is sound and profitable and will pay back this loan in a timely fashion.

• Friends and family. Same thing goes. Before taking your rich uncle’s money, be able to demonstrate convincingly that this is a good business to invest in. He won’t give it to you otherwise.

• Leasing equipment and fixtures. Leasing can be very expensive but it’s worthwhile to shop different options to see where you can get the best deal. It’s best to have the advice of someone who is familiar with this type of financing.

• Vendor financing. Companies that want to do business with you and are convinced you are a good credit risk will extend you terms that will allow you to purchase goods from them. Use them to make money and then pay for these goods out of the resulting sales revenue.

As a last resort . . .

• Credit card. Financing via our credit card is an expensive trap. You’re playing with fire–or dynamite. Yet, sometimes we must do it. There’s a way to make it work if you are an excellent manager. If you have a good credit score, you will get offers for low cost balance transfers into a new account. Sometimes at 0% for a time. If you manage very well, you can replace one loan with another loan before the interest rate increases to a higher level. This is a dangerous game to play but it can be done successfully.

Downsides of Bootstrap Financing

Bootstrap financing may be necessary initially, but it has major downsides. You need to find other sources to capitalize your growth.

Bootstrap financing means to fund your business launch or growth without outside capital, relying on internal savings or cash flow generated by operations. This severely limits their rate of growth.

Some entrepreneurs bootstrap out of necessity: they have access to no capital. But many rely on internal resources even when they could obtain capital. I see two main reasons:

• Fear of debt, perhaps out of prior bad experience. They don’t trust their own resolve to repay debt so that it doesn’t just pile up.

• Lack of trust in their own business model and acumen. They’re just not convinced they can make their business succeed so that it is a good investment.

Owners achieve a major leap in business maturity when they overcome these fears and become willing to invest in their own company—via loans or equity investors.

Many small companies that self-finance their launch or growth are chronically under-capitalized. They are always running on empty. This can lead to some very bad habits in the way you run your business.

• You take any work that comes along because you are so cash starved. Thus you take unprofitable work that can actually put you deeper in the hole.

• You’re more worried about revenue than about making a profit.

• You work all the time. If you bill by the hour, anything that is not billable is suspect, such as planning, marketing, developing strategic relationships. When you make commitments to yourself, to develop new products or service for example, you are always willing to break these commitments to take paying client work. You always bump your commitments to yourself—or your family.

• You operate as the “lone ranger.” You are reluctant to get outside advice and expertise because of the time and money it requires.

• You wear all the hats. You do everything yourself. You are reluctant to spend on outside services, even if it would allow you to use your own time more effectively.

• Thus, you use your time poorly.

No plan. No strategy. Just work. This is the route to burnout or bankruptcy. And staying tiny.

“Alternatives to bootstrap financing” are described in my next post.