Today a friend came into our office to seek some free advice. His question: how do I start a business with no cash? After a long winded series of questions and answers, I should have just said, “you can’t.” Mikel said that pretty quickly. Perhaps I’m a slow study. Maybe I like a good challenge? I’ll walk you through the most coherent parts of my friendly advice. Then, I’ll provide the counter arguments. Use both sides at your own risk!
1. Start with a service. Sell your skills on commission or project basis instead of hourly. This is essentially the freelancer starter kit to business ownership and investment. You invest in yourself. Live on less than you make and allocate your extra hours or cash into growing your new business venture. Hire an employee. Make the overage.
2. Get product sales orders based on your suave nature, reputation or customer desperation. Then, take those signed sales orders from noteworthy customers and go get a loan from a cashflow based lender. Use the loan (maybe 50-70% of sales order) to buy or manufacture the products (make sure to only sell fat gross margin products.) Collect from customer and pay down the line of credit. Rinse and repeat. In this way, you don’t have to put cash into it. The risk is reduced and you’re underway… presumably with some profits.
3. Use customer’s cash. Get sales and pre-payment from customers. Use their cash to finance your growth. This has been my favorite way to grow because it totally proves that customers love what you’re building and selling. And for me, I’m so hung up on the reputation risk that I go way overboard making sure they’re satisfied. They often get a better price and the absolute best experiences. Use that to jump start things and wean off of it as growth slows and profits become more important than cashflow (hopefully that’s a long ways off.)
4. Finally, split the difference. Do any and all of the above in combination. This is the ultimate founders game. Juggle all methods simultaneously across a few entities, including leveraging your spouses income and your home equity. Dangerous, but early on, it’s how MOST entrepreneurs get started.
In the end, my friend literally said the words, “I’m okay with some risk, but I don’t want to expose any cash.” Mikel wisely said, “dude, the cash is the risk.”
Reviewing the above, here are the counter arguments that make this no-cash utopia impossible. It simply cannot be done.
1. Start with a service. The reality here is that you have to be able to survive until you get paid the first time. Unlike payroll, this is often 30 days if you land something on your very first day of business. More likely the sales cycle is longer than “instant success.” Plan in no less than 90 days and often 6 months to a year. And that’s just to get back to the salary or hourly paycheck you were accustomed to. More than likely, you won’t actually pay yourself the full rate because you’ll want (or need) to hire someone to help. You’ll need to use that cash and reinvest. Start paying yourself a lot? Plan on growing more slowly. So, no cash required? Uh… no cash required to start but cash is certainly required to survive.
2. Loan based on sales orders. Not only does this strategy have the same challenge as above (floating things until you get the sales orders and then loan, and then paid) you also have the encumbrance from the lender. Ain’t no free ride here either, dude. Your equity elsewhere will get dog-eared. If the loan repayment stalls, the banks will come calling for what? Cash. Don’t have it? Sell something.
3. Using customers’ cash requires a discount. While this trade does not require cash today it’s a form of factoring where your customers are getting a sweetheart deal. You as the owner are trading out future cash. I greatly dislike factoring so me using this as a contrast against my favorite form is significant. But, keeping it real, the customer is essentially the lender… and you’re keeping it in the family. Beware. This can go grossly wrong if you don’t deliver… because you won’t have cash to refund the failed order.
4. Splitting the difference only masks reality. You are expending cash in multiple areas. That cash may or may not return to you in whole. That is risk. That is uncertainty. It’s complicated and unknown. Stir in some competitors, lenders and slow paying customers and you’ve officially cut your teeth on business 101.
Most entrepreneurs work real hard to make all this look easy. But the core principle here remains… sacrifice today for benefit tomorrow. How deep of a valley and how long to cross the valley are you willing to risk? What if you’re wrong?