If Cash Is King, Credit Is Queen

Deciding how to finance your business depends upon your personality, business type, and level of discipline -- and your patience

By Emily McHugh

When it comes to financing options, the debate is usually between debt and equity. In equity financing, one gives up control of the business to have the opportunity to grow faster, whereas with debt financing one keeps control, but risks growing more slowly. If your business is highly capital intensive or research-driven -- for example, if you want to roll out a national chain of tea parlors or develop a cutting-edge killer app -- then you may need the deep wallets of an acquiescent venture capitalist.

However, if you can slug it out and grow organically without selling your first-born, then you may want to carefully consider the alternatives before taking the equity plunge. The key is avoiding the desperation that might prompt you to rush into an arrangement that could be premature.


  So how did my company, Casauri, do it? I get asked this question -- how did we financed our business through the startup stage? -- all the time. First, we analyzed what made us comfortable and uncomfortable. The second consideration was to determine our desired result. Our sources of capital at the various stages of startup included loans from families and friends, an SBA micro loan, credit cards, a manufacturer's advance, bank lines of credit, and -- my personal favorite -- upfront cash deposits from customers.

On Day One of our business, we had no cash to finance anything. I was graduating from Columbia University Graduate School of Business with a student loan to repay, no job, no signing bonus, the prospect of even more debt -- and the dream of entrepreneurship firmly rooted in my head. But what I did have was stellar credit, as a result of carefully managing credit-card use throughout my college and graduate school years. Good credit paved the way for our financing, and it still does.

Moreover, I had a mission for my business: to introduce a stylish alternative to hideous laptop cases, especially for women. No one was doing it, so I decided that I should. The summer after my graduation, in 1999, my company, Casauri, was born, and the question became how to finance by objective


  I got a part-time job as a temp, then at a handbag store, while playing my violin in the New York City subways, and selling scarves in Times Square that my sister, Helena, made. Helena, who is my only business partner, was working full time, and that helped with the cash crunch until she was downsized out of her job. Throughout this time, I was steadily working on the business concept, doing research, finding suppliers, and exploring our market opportunities.

I applied for a micro loan sponsored by the Small Business Administration, and that provided our first external capital infusion of $25,000, enabling us to make our first production-quality bag samples and to participate in our first trade show. Then we received a $4,000 grant for women business owners from the state of New Jersey.

By some standards, we may have been taking the slow boat to China, but we decided that it was preferable to the fast-track alternatives. Moreover, we were comfortable with taking that slow-but-steady approach. Nonetheless, we did explore other avenues for financing, including meeting various angel investors, who proved to be anything but angelic.

One of the most onerous investor situations was the proposal to sign away 50% of our business to an investor who not only knew little about our industry, but had actually lacked sufficient funds to fund our venture. His cash infusion of $28,000 immediately became an equity-to-debt transaction. This was a defining moment in our business. We decided there should be no equity partners unless it made sense, it was the right time, and above all, it was the right partner.By Emily McHugh


  Thank God, not everyone we met in the minefield of business was demonic. One exception was a successful businesswoman, an alumna of my school, who was interested in what we were doing. Concerned that I looked too thin and wanting to make sure that I was eating, she wrote us a check for $5,000. I am happy to say that we were able to repay all the debts mentioned above, and do so in full, from our business cash flow.

Our cash flow improved even more when we started to accept credit cards and upfront payment from customers. All entrepreneurs need to spend less time worrying about debt or equity financing, and a lot more time figuring out the route to positive cash flow. Getting the product to market and generating sales should be the entrepreneur's primary focus.

Now you might ask, how can I sell if I don't have funds to produce a product? My answer to that question is, consider starting small. Estimate how much cash you really need for specific stages of your business. Then decide whether you can do with less. The learning curve is probably your biggest startup expense. It is important to realize that financing is not an entrepreneurial panacea, and being well funded is not an automatic guarantee for success. Financing is a means to an end, not the end in itself, unless of course, your business is banking!

Hence, I am a big fan of bootstrapping. It builds entrepreneurial character and fosters traits necessary to grow an enduring enterprise. Bootstrapping demands extra discipline, since you will have to do more with less. Firmly ask yourself this question: If an expense cannot be offset or matched, either directly or indirectly, to a cash-producing result that leads to profit, then how do you justify the expense?


  Using debt prudently is a highly advantageous way to start a business. But beware of the spiral effect, which may see you accumulate debt with no plan or ability to repay it. One of the benefits of debt financing is that it makes one more responsible about finding a way to make the business work.

The intelligent use of credit cards is key in this equation. The secret of course, is to pay the balances in full every month and never pay late! If you can't do this, then do not use credit cards. Once you start to develop a track record of sales, ask your bank for a line of credit at a low interest rate. It is a good idea to get a line of credit even if you do not need it right away, because oftentimes it is easier to get money when you do not need it than when you actually do.

The key to debt is to use it as a tool with the objective of constantly reducing and eliminating it, so that you can obtain even more access to credit. When the day arrives that the demand for your product exceeds your ability to finance it from cash flow or even debt, then it is time to explore other options for financing. Take it in stages and do what is appropriate at each stage of your growth. But make sure to never sell your soul.

Emily McHugh founded Cameleon International, Inc., which does business as Casauri, in 1999, after earning an M.B.A. from Columbia University Graduate School of Business. She currently serves as chief executive officer and creative director. Headquartered in Fort Pierce, Florida, Casauri designs and makes fashionable carrying cases for laptop computers. Emily's sister, Helena McHugh, is president and designer, and a graduate of the Fashion Institute of Technology (FIT) in New York. Prior to graduate school, Emily McHugh worked for Banque Nationale de Paris in New York and Mexico City. She also spent a year in Oaxaca, Mexico, teaching English to Mexican telephone operators and violin to a local mariachi band. Emily is a 1990 graduate of Swarthmore College, where she received a B.A. in linguistics, French, and Spanish.

Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation.

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