How Do You Afford To Start A Business?

How Do You Afford To Start A Business? - Brass Tack ThinkingMy current firm, SideraWorks, is my second adventure into owning a company and being in business for myself.

Whenever that comes up in conversation, at an event or something else, I inevitably get asked “how” I did it.

By “how”, some people mean the particulars of setting up a company or finding a partner or getting clients. Some mean how I screwed up the courage to take a leap and a bunch of risks. But what most people mean is “How did you quit your job and still afford to pay your bills while you did this?”

So many people don’t pursue their ideas, their passion projects or their desires to change careers because of the vicious “I can’t because” cycle.

I can’t quit my job because I have a mortgage and bills and need to support my family. And I can’t earn more money at my job now so I can’t save the money I need to be able to quit. And if I can’t earn more money and I can’t break out of this job and do something else. So if I can’t do something else I’ll just keep doing what I’m doing because my family needs me, and I have to pay my bills. So I can’t quit my job.

This is the death knell for many a dream, business, and career change.

So I’m going to give you the Brass Tacks about how you can afford – financially and otherwise – to do something like this. I’m not promising you easy. I’m promising you real. But also very possible.

1. Get out of debt and reduce your outgoing expenses.

This is the hardest part for people to accept.

Unless you have independent wealth outside of your regular income, you cannot maintain the same lifestyle that has built your credit card bills and a substantial mortgage and still put money aside to fund a side venture or a business.

You have to save money, because you need capital to do this (more on that in a minute). You can’t save money if you keep spending everything you have just to get to the next paycheck. That means that if you are in debt, you need to work to pay it down or off altogether, which requires making more than the minimum payments on loans and credit cards. Presuming you don’t print money in your basement, you need to be able to redirect the money you do earn and put it into a fund to fuel your business.

If you need help to do that, I encourage you to work with a financial planner or a legitimate and independent debt counselor to get your stuff in order, because it doesn’t happen overnight. Trust me, I know.

Which brings me to the next “must”.

2. Make difficult choices.

In order to pay down the debt or set more money aside than you’re doing now, you’re going to need to make tough choices.

The level of those tough choices can range from not eating out so much to downsizing your house, or even temporarily reducing or stopping your contributions to your savings, retirement, or other accounts. Most likely it’s a combination of things.

I realize this last bit of advice is bound to get rocks thrown at me by financial planning people everywhere. But listen, I’m not about the conventional financial wisdom. If you want to find capital now in order to fund a business venture that could increase your earning potential later, you have to take risks and make sacrifices somewhere financially. For most people who want to bootstrap a business instead of taking out big loans or chasing down outside funding, that means finding more flexibility in the money that you already earn since you can’t just manufacture a raise or a second income overnight.

The choices and sacrifices you have to make will surely affect other people around you. Your family, your kids. I’m not going to lie, it’s really (really) difficult to do something like this without the support of others. They have to not just believe in your ability to succeed, but be willing to accept and share the risks that come along with the potential of failure. That’s the part of the discussion no one wants to have, but it’s crucial.

Making the leap from something you have to something you want doesn’t come without sacrifice. If that seems impossible no matter how you look at it, your status quo might not be as unpalatable as you think it is. That’s a conclusion only you can reach by being painfully, brutally honest with yourself about what you’re willing to give now for the absolutely-not-guaranteed vision of something else.

3. Have realistic expectations about the costs of building a business.

My brilliant friend, mentor and benevolent ass-kicker Carol Roth has an important insight about building businesses.

Everything takes three times as long, is three times as hard, and costs three times as much as you expect it to. Nothing could be more true, and that comes from someone who has been there and lived it. (While you’re at it, Carol’s book The Entrepreneur Equation is a really good investment and reality check to see if you’re cut out for this entrepreneurial thing.)

In my experience, you’re going to need at least six months’ worth of personal expenses in cash, in the bank. That’s not counting operational expenses you need for starting the business itself. That’s why it’s so important to reduce your outgoing expense burden as much as possible, because you’re funding your own salary for as long as it takes to get cash flow in the door for the business and start paying yourself. It seems fundamental, but so many people forget that they have to do the math for their living expenses and the costs of the business itself if it’s all being self-funded.

As for business expenses, always overestimate. Do the math around what it’s going to cost for the first twelve to 24 months. Consider production costs (for prototypes and products), legal costs (for incorporation, partnership agreements, operating contracts, buy/sell agreements, and all sorts of other important documents), accounting (trust me, unless you ARE an accountant, you need one), business development and marketing (website development, collateral production, events you want to attend, commissions and referral fees), travel to see prospects and early clients.

Think through the math thoroughly, come up with a figure. Then add 50% as a contingency, and make that your savings goal. You might be able to start before that, if you’re willing to take the risk. Remember that no bootstrapped business has failed because of overcapitalization, but plenty have failed because they ran out of cash. As much as I love the idea of $100 startups, it’s the spirit of pursuit and passion that I champion much more than the premise that anyone can build a company with zero capital. It’s awesome that some people can do it and have. It’s just not my experience, and I don’t think it’s a smart way to plan.

I know the idea of saving a good chunk of money is scary and intimidating. But it’s also very important for most businesses that survive past the first year. Building a business costs money. Sometimes, a lot of it. If you’re a freelance writer, your overhead costs are going to be much smaller than if you’re trying to start a new line of toys. If you’re hoping to earn a decent living as a solo freelancer, that’s a different proposition than building a business that can grow and scale, and you can probably afford to launch with less.

But regardless of what you want to do, more money will be going out than in for quite a while at the start, and believing otherwise is a surefire recipe for heartbreak.

4. Know your “Whatever it takes”.

When I started my first business, I told myself that I was willing to bartend, work at Starbucks, mow lawns. Whatever it took to supplement my income and bring in the bare minimum to keep the bills paid and the kid fed. I did everything I just told you not to do and I had six months’ income in the bank, limited personal credit, and zero safety net. I had a mortgage and a one-year-old daughter and I was the household breadwinner. I gave myself a year.

I had my first client in three months.

(Despite all of my advice above about planning realistically for the costs and the risks, there’s something to be said for having a bit of urgency tied to what you’re doing. Desperation is not a business strategy, but if you have a good strategy to back up your ideas, urgency can be fuel for the fire and push you outside your otherwise comfortable zone.)

The point here is that you have to have a pretty hard talk with yourself about what you’re willing to do, endure, and risk in order to do this thing that you say you want so much. Are you willing to quit the gym and fire the housekeeper? Tell the kids they can’t go to camp this summer? Work part-time? Sell your car? Downsize your house? Go deep into debt?

We all have limits, and things we will or won’t do in pursuit of our dreams. The reality is that most people think they’ll do anything and everything but when the chips are down, they mean “everything short of X”. There’s no right answer to your X, but you do have one. We all do, and should. You need to know it going in, because if you come up against it, you’re going to have to decide whether owning a business means enough to you to revisit that limit, or whether you’re going to toss it in to fight another day when you hit that spot.

That “X” often comes down to the money equation. How much are you willing and able to cut back? How much debt are you willing to take on and risk? Are you willing to risk financial hardship? Damage? Bankruptcy?

Incidentally if my answer matters to you, I went into about $35,000 worth of personal debt in business venture #1. It took me three years to pay it off, but debt was something I was willing to do for a couple of years if it meant coming out on the upside in the long run, which I did. Your mileage can and will vary. People have gambled anywhere from thousands to millions of dollars of their own money (not an investor’s) on business ventures. Only you know your risk tolerance. No one can decide it for you, but you do need to come to terms with what it is.

5. Quit comparing yourself to everyone else.

Some people will take out loans. Some people will seek outside funding. Some people will work three jobs. Some will borrow money from their friends and family. Some will bankrupt themselves. Some will liquidate their savings or their investments. Some will sell their antique silver collection. Some will tap an inheritance or other windfall. Some will use money they earned from previous business ventures to fund their current one. Some will rely on their partner or spouse’s income while they build.

From the outside, you will rarely if ever know the whole story of how people funded their businesses. Because frankly, unless you’re answering to investors, it’s really none of anyone’s business how you decide to finance your dreams. For many people, it’s a combination of both capital they have and debt they incur.

But what someone else did or does doesn’t matter a whit.

By all means educate yourself about your options (please), but the only answer for you is the one that works for your lifestyle, finances, and the nature of your business.

It’s really easy to look around the hot, hyped world of entrepreneurship and believe that everyone but you has the secret formula and they’re just not telling you. They don’t. They either have their own money, got someone else’s money, or are borrowing against future money. That’s it.

Draw your own business picture, because ultimately the person responsible for financing your life and work is you.

6. Pull the trigger.

Here come more rocks.

I believe you can always find a way to earn money. It might not be glamorous or lined up with what you think is “worthy” of you. It might be a kit-bashed mess of part-time jobs, freelance work, selling your handmade bracelets on Etsy and walking dogs in the neighborhood. The limitations are more about what you’re willing to do than what’s possible to do in order to earn a paycheck.

If you want this, you have to pull the trigger and do it. It’s like having a baby. You’re never really ready, no matter how prepared you think you are. Emotionally for sure, but financially too.

The fact is, you are taking a huge financial risk. I think that’s an exhilarating, wonderful thing. You can’t take it with you, after all. And one major point to entrepreneurship is to achieve financial independence, whatever that means to you (which is not the same as being “rich”, btw).

For some people, the idea of risking money at any volume makes them physically ill.

I think this is a mindset thing. You’re either comfortable taking risks with money, or you aren’t. But if you look around at the people who achieve wealth and financial independence through their business ventures, they’re the ones willing to put skin in the game. Sometimes all they have. They’re not the ones who hung tight until everything was bulletproof (ha) worrying about whether they’d be able to keep paying for cable. They’re probably not even the ones who worried about whether they could keep paying their mortgage.

Financial risk is part of this game. Period. If that reality isn’t comfortable for you, it’s very possible that being in business for yourself isn’t your thing. And there’s absolutely nothing wrong with that. Just because everyone seems to talk about entrepreneurship doesn’t mean everyone is cut out to be a business owner. It’s hard. It’s stressful. It’s terrifying. It can be very expensive. But ask the people who have done it, for better and worse, and I bet most of them will tell you that the risk was much more palatable than knowing that they never tried at all.

Still with me?

That’s what I know. It’s not all rah-rah-kumbaya, I know. Some of it is intimidating as all hell. All of it is real, though, and no actors were used or harmed here. I have zero perspective to give you about the flashy world of VC and angel investing because I know nothing about it. I’ve done what I’ve done by putting my money and lifestyle on the line. Simple as that.

All I’ve got to give here is some perspective from a human, fallible and successful business owner who has managed to do okay for herself. The best part is that if I can do it, anyone can. That means you, too. If you want it badly enough and are willing to make honest choices.

If you’ve got experiences you’re willing to share about the money side of being in business for yourself, I’m sure there’s lots of people here who can benefit from your wisdom. And if you’re one of the ones who are dreaming about this but seem to be caught in the “I can’t because” cycle, I hope the discussion here is helpful.

Now then. Skip that latte, shove an extra $5 in the bank, and get going. Life is short. You’ve got stuff to do.

  • Guest

    Thanks for the further “kick in the pants,” Amber. I started my own business a year ago. I’ve worked harder than I ever worked in my previous agency jobs. You advice on the money side is something all current and future business owners should listen to.. now.

  • jasmollica

    Thanks for the further “kick in the pants,” Amber. I started my own business a year ago. I’ve worked harder than I ever worked in my previous agency jobs. You advice on the money side is something all current and future business owners should listen to.. now.

    • Amber Naslund

      Being in business for yourself is, without doubt, THE hardest job there is.

  • heidi c.r.n.w

    Nice post! People always ask me how I did it, and then say they wish they could do it to but can’t “because…because…because…!” The truth, as you point out, is that it’s a decision that involves planning and cutting corners. Some people just aren’t cut out for it.

    • Amber Naslund

      Some aren’t, that’s true. Some are, but prepare poorly and end up hurt as a result. It’s definitely a road of tough decisions and investment, no matter how you slice it. Thanks for the comment, Heidi.

  • Vikas

    Great Post!

    Here is a bit about my entrepreneurial story – parallel threads:

    • Amber Naslund

      I love this story and am so glad you shared it. And kudos to your wife for being such an unerring source of support and encouragement. You’re fortunate indeed.

  • Carmelo Bryan

    Using your own money is so much more tactile, personal and focused. You don’t make as many willy nilly decisions. Every dollar counts. You look at the ROI of every move you make.

    I spend some years as an Owner Builder home building consultant helping people build their own homes. These people, whether they knew it or not, learned how to run a small business! And it helped me build my own business leaner and meaner.

    Great stuff, Amber. With focus and commitment it can be done. Just get to it.

    • Amber Naslund

      Using your own money is just really difficult for some people because they don’t know how to get from where they are today to having the money in the first place. That’s why the first part about saving and getting out of debt is so critical. You have to have the money in the first place!

  • Pat Alexander

    Amber, great post. The single best thing we ever did was to pay off our mortgage. I had an unblievable year a number of years ago, we only had a few years left on our house payments so it was an affordable amount. I was already in business for myself at that time, but no longer having a mortgage allowed me to be more selective in the projects I seleted to do. You do much better work when you have this option.
    My husband and I have no issues with driving vehicles for a number of years and not needing some large new home that we can barely afford. While I certainly have my money faults and weaknesses, I have learned that managing my finances and not being under pressure of looming overdue bills, frees me up to be more engaged with my clients and more creative.

    • Amber Naslund

      Thanks for weighing in, Pat. Awesome that you had the ability to pay off the mortgage. And though I don’t think that’s an option for everyone, it’s the same idea: getting yourself free of as many debt burdens as you can (including houses if that’s an option). For sure though and no matter what, releasing some of the pressure of financial burdens is critical before you take the big financial risks that come with building a business. thanks for sharing your experiences!

  • Susan Giurleo

    GREAT post! So nice to hear some reality being shared about what it really takes to build a business. I went into some debt to build my businesses. Most of it is paid off now and we are able to save for retirement,college savings and looking to build a new house. We put 8 years into building what we have and it’s paying off. I did not have a $100 start up or a 4 hour work week. Truly successful entrepreneurs know it take real money and real time to build something of value.

    • Amber Naslund

      Thanks, Susan. I honestly fear that many small businesses and entrepreneurs fail because they don’t GET a reality check. They read get-rich-quick and insta-business stuff and don’t think through the realities of what sustainable businesses need to do in order to survive let alone grow. I’ve put everything I have into SideraWorks, and I believe it’s going to pay off in the long run. But no question I’m taking big risks to do it and sacrificing a LOT now in order to have something of substance later. Fingers crossed! Thanks for sharing your experiences.

  • craigcarrel

    Excellent information! We started our business 25 years ago with $110,000 in the bank and some equipment financing. We only had $2,000 left when we finally started making a profit 18 months later. One piece of advice that we received that was very helpful was that most people can predict expenses fairly close but it is the sales that is difficult. They suggested we keep cutting our sales projections until we reached a sales level we felt confident we could easily meet and then cut it again another 10%. Just as you mentioned most businesses fail just as they are starting to gain business but they run out of money.
    I have some articles that I share with potential entreperneurs with good advice and I will plan on adding this information to it if you do not mind.

  • Brandon R Allen

    Great info. I totally agree with the approach. I would also add to this to start building some momentum even before you start. This worked well for me. I started branching out through networking and blogging before I stepped out so that I had some momentum going into my venture. It also allowed me to recognize what it was that I truly wanted to do to create value.

  • marketing strategy

    Very informative thank you for this post.. I learned alot

  • Pingback: Great articles roundup: Leaky buckets, evil marketing, midnight tokers, affording business and social media fragmentation | Francis Moran & AssociatesFrancis Moran & Associates