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It was an idea Michael Godel, a Toronto fine-food caterer, had been toying with for years. He had been noticing the growing popularity of vintage wines, so in 2004 he decided to create an online adjunct to his business where customers could read expert recommendations and order new releases.
To pull it off, he'd need an attractive website. However, he didn't want to invest capital he didn't have. Nor did he want to draw from his company's $25,000 line of credit. Instead, Godel asked an acquaintance, an architect who was on sabbatical, to help him create the site. The architect hired a pair of software designers, and together they worked on the e-commerce features for eight months before going live last year. Godel arranged with the architect to pay for the work, worth $8,000, as soon as his new business, Vintage Direct, started making money.
Godel is no stranger to the art of innovative small-business financing. He launched his first company, All Our Favourite Foods, out of an east-end industrial building in 1993, by cutting a deal with the landlord. Godel promised to secure the building approvals and renovate the place if the landlord knocked $10,000 off the rent. He then went to his bank and obtained a $10,000 small-business loan to buy kitchen equipment. A decade later, with Vintage Direct, he took an even more economical tack. "I was able to finance it slowly myself on a pay-as-you-go basis," he says. "There was never a point where I suddenly had to pay out large amounts of cash."
His foray into wine has proven to be a big hit with customers. What's more, his story offers some insights into one of the most important aspects of launching a small business. To survive those crucial first months, entrepreneurs need to find the right kind of financing, a search that often calls for as much ingenuity as the business venture itself. According to the Royal Bank of Canada, financial institutions approve about 80% of small-business loan applications, but the hunt for investment capital doesn't begin or end at the branch on the corner. Nor is it a random search based on hunches. It requires research and preparation.
You need a plan
While entrepreneurs pride themselves on their spontaneity and willingness to take risks, Kevin Dane, a VP for the Business Development Bank of Canada, says it's still critical to meticulously plot out your venture. That means a business plan. And if it's going to sway anyone, your plan will need to outline the opportunity, the competitive environment, the marketing strategy and the sources of financing. What's more, it will need to do it in a concise and realistic manner. In fact, you'd be well advised to hire a corporate writer to polish it up before presenting it to anyone.
If you go it alone, however, there is ample information online and in bookstores on how to prepare a compelling plan. What almost everyone will tell you is: Be ultraconservative about sales projections and very clear-eyed about the competition. "If you think at six months you'll be selling a million dollars of something everyone else is selling, that's unrealistic," says Dane. "The pie is only so big."
Hint Cut to the chase. Lead off with a tightly worded executive summary that lays out the proposal, explains why the venture requires financing and specifies how much you need.
Cash flow is king
Regardless of whom you approach, rest assured that the first thing any lender will look at is the dollar signs. When it comes to financing, it's all about the money. The best way to determine how much you need is to develop a cash-flow forecast, says Kris Depencier, head of small business for RBC. Begin by tallying up the monthly costs of your start-up expenses (items like equipment and inventory) as well as your ongoing operating outlay (rent, utilities, technical support and office supplies) and your personal cash needs (salary, personal mortgage, etc.). After you subtract your monthly sales projections, you'll have an estimate of your monthly cash requirements (a.k.a. burn rate). That number—which, alas, will be coloured red—provides a rough calculation of how much money you'll need to bring into the business to stay afloat. The benchmark for most business start-ups is profitability in Year 3. That doesn't mean you won't be raking it in earlier; just don't count on it.
Hint Besides securing a line of credit, it's a good idea to set aside a rainy-day reserve fund equivalent to one-fifth of your total upfront investment, to cover operating expenses through slump periods. Make sure to keep the money separate from the business.
Very personal finance
For many entrepreneurs, the first stop for cash will be family and friends. Toronto-based business consultant Larry Ginsberg cites the case of a tech start-up where the principals all had paying jobs so they could cover the rent while they wrote code. To take it to the next level, though, they approached a number of personal acquaintances and put together enough cash to see them through a six-month development phase. But such arrangements should be at least as formal as bank loans—a written agreement complete with interest fees and repayment terms—and treated as such.
