Thank you for your letter last month about trying to pre-sell my business product. I did go and talk to everyone who I know that might want to buy from me. I find that they are very uncertain. They are not prepared to even think about buying till they have the product in front of them.
So what now?
You are right. Going and speaking with potential purchasers has the advantage that you learn a lot about what sorts of things they are looking for, what the gaps in the market are, what are the criteria they use for the purchasing decision – all essential information for anyone in business.
But, so far as financing your business is concerned, if you can’t find advance purchasers, we come back to the only two other options: investments and loans.
You will have seen from my previous letter, that I am not a great believer in loans, whether from banks or from individuals.
Why is that? Because anyone who lends you money is interested primarily in having the money back at the end of whatever period is agreed for the loan, in addition to any interest payments that may be arranged. Moreover, there may be some relatives or close friends who are prepared to loan you relatively small amounts, but there are very few individuals or banks that will make you a substantial loan without “collateral” – that is, something that you can pledge to give up if you don’t return the money. For example, a loan to purchase a car is usually set against your house, your salary, the car itself (or some combination of those sorts of things). A “mortgage” is usually set against the house itself, as well as against some assessment of your salary. You must have some assets that can be taken by the lender if you don’t repay the loan.
My view is that if you do have any such asset, and the following is at all possible for you, it is better to sell off that asset (for example by moving to a smaller house) and use the capital released, rather than tying yourself down with a loan, because interest payments are usually very high and become a bind around your feet as you struggle to repay the interest every month. Better to face the sacrifice of a simpler lifestyle than to have the stress of meeting monthly repayments. Moreover, in principle, any bank loan can be “recalled” at any time. In theory, the lender can ask for the main loan amount to be returned at any time. Though unlikely, this is a permanent threat hanging over a business.
By contrast: while an investor in your business can of course sell her or his share in your business at any time, the burden is on the investor to find another person or institution to buy the shares and, from your point of view, at least financially, it does not matter who is investing in your business.
However, ideally, you want investments from people who you like and trust and who have a common faith in the possibility of success for the business (because any investor is a part-owner and it is owners who decide what direction a company should go). At least at the start of any business, investors tend to be family members, friends and colleagues. You need fellow-investors rather than mere lenders because fellow-investors have a commitment to helping you to succeed in your business, because if your business fails they lose money whereas if your business succeeds they make money too. Fellow-investors are likely to look out for new customers for you, for cheaper places where you can buy things you need, for the most qualified and energetic employees, and so on.
Nowadays, there are also various government schemes for supporting businesses, and institutions such as the Dalit Indian Chamber of Commerce and Industry, which can be helpful. So it is worthwhile to check these out.
Of course, there are also venture capitalists and private equity organisations and, if your business idea is big enough, the possibility of setting up a business via the Stock Exchange – but these usually become realistic only after you have demonstrated substantial success in your business for at least three years and usually more.
I also ought to say that there is something called the economic cycle: all economies go up and down (and hopefully not too far down). Whenever an economy is depressed, it is much more difficult to find investors to start a business. But whenever an economy is flourishing, it is much easier to find the money to start a business. The corollary is that when it is easier to get the money, there will be many new businesses starting, and therefore there will be much more new and unexpected competition and much faster change in the business scene. Yes, change can also occur quickly when the economy is going down but, if you can survive the down cycle, there will be many more opportunities for you.
Whether the economy is up or down, you won’t find many investors (in most cases even lenders) who will look at you seriously if you don’t have a business plan. To that and related topics we turn in my next letter.
Published in the November 2013 issue of the Forward Press magazine
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