This article originally appeared on Quora: What advice can you give a person wanting to start a business with very small capital?
Starting a business with very little capital is very challenging, but it can be done. Entrepreneurs are often restless and it’s always tempting to “get going” with a business idea even when you don’t have everything you need. We glorify “bootstrapping a business” and idolize companies like Mary Kay and Domino’s Pizza that were started with a few hundred dollars. But the reality is if you run out of cash you’re done—even if your business is “technically” profitable. Starting with very little capital works best if you get paid immediately, have low overhead, and don’t have high inventory or labor expenses.
In any business, cash flow is everything and there is often a big gap between the time when you get paid and when the bills are due. Unexpected expenses, fraud, or a customer default can sink your entire business if you don’t have a cushion or line of credit with a bank. Some entrepreneurs have used personal credit cards to keep things going. At one time, I had $50,000 in accounts receivables and deposits waiting to clear, while simultaneously searching my couch cushions for spare change and borrowing from friends and family to keep the lights on until the payments came in. As your business grows, this problem will compound past the point where credit cards and personal loans can keep you afloat.
If you are going to start with very little capital, you need to plan carefully and conserve all the cash you can. This starts with your business model. Ideally, you are starting a business with very little overhead, with you as the primary source of labor, and a model that can scale as you grow. Keep in mind that any business with this model is going to have lots of competitors, so you’ll need to compete fiercely for customers.
Some things to keep in mind:
- Don’t spend a single dollar without thinking about how that dollar is going to grow your business. If what you are buying isn’t getting you more customers or enabling you to serve more customers, don’t spend it. Keep your costs low and make every dollar count.
- Your business account is not your personal piggy bank. Be prepared to take little or no salary for the first year of your business, even while paying employees. For the first few years of your business, you may be the lowest paid employee. Get your personal expenses down to as close to zero as you can.
- Don’t assume you have to buy everything for your business. Leases are available for almost everything. If you are just starting out your business won’t qualify for a line of credit without you personally co-signing and guaranteeing a loan. But if you can rent a piece of equipment for $50/month versus buying it for $1,000 when you’re starting out you can use the $950 on something else.
- Leverage the cloud and software as a service (SaaS) capabilities. Before you spend a single dollar on any software see if an alternative is available that can be used for a monthly fee—accounting software, CRM, sales planning, project management, email, cloud file storage. Cloud apps let you pay per user per month and you can scale up or down as your business needs change.
- Hold off on opening a physical office space unless you absolutely have to. Office space is expensive, and unless you need to meet customers in your office or have a physical retail or manufacturing space, don’t open an office. I worked for a consulting firm that didn’t open an office for nearly 18 months after they started. By that time, they were making over $1 million in annual revenue.
- Don’t buy any equipment new: Businesses go under all the time. Almost anything you need from office furniture to manufacturing equipment can be purchased used. Talk to your business banker—they often know of other businesses that went under and are liquidating and the banks want these assets off their books. Sometimes you can walk into a business with very little capital. (For example, , by buying a Domi-Nick’s pizza. They didn’t have enough money to change the sign, so they made a quick edit).
- Make your business banker your best friend. If your business receives cash or checks in payment of services, walk those deposits into your branch during business hours and make sure you say hello to the bank manager and the business banking manager weekly. Eventually, you will need a line of credit or a loan from the bank and that is not the first time you want to meet a banker. If they know who you are and they see you frequently, you will have a much easier time getting help when you need it.
- Learn some basic accounting principals: You don’t have to be a CPA or even an accountant (you can always hire one), but you need to understand how to track your income and expenses and be able to determine which activities are profitable and which aren’t. You also need to be able to forecast cash flow—I can’t stress this enough. Unexpected events and expenses will pop up. Without sufficient capital, you can look successful to the outside world and still go out of business. The more you know about your business, the more control you’ll have.
- Be slow to hire: Full time employees are a huge overhead, and you can hire business services and freelancers to do almost everything your business needs until you are at the scale where you need a full time employee—and even then 2 or 3 dependable part time freelances may still be a better option.
- Choose quality customers or quantity: A good customer who is easy to work with and pays on time is better than a three bad customers who spend twice as much but never pay on time and are difficult to deal with. If you track the time spent dealing with lousy customers, you’ll quickly find out that you’re actually losing money. Don’t be afraid to fire your customer.
Always keep in mind that “cash is king” and net profit (what you actually keep after all the bills are paid) is more important than lofty revenue goals. If you run out of cash, and can’t secure a line of credit (or have exhausted your lines of credit) you are finished. To be successful you really have to focus on high value activities and investments that grow your business.
On the plus side, the habits you learn growing a lean business will serve you well in the future. Sometime having too much starting capital is worse for a business—it gives the early illusion of success and leads to wasteful processes and business practices. By starting lean, you’ll be more likely to maintain disciplined financial practices as your business grows.
Bernie Klinder is a entrepreneur, investor, consultant, and EMBA.