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Funding Your Business with Other People’s Money

(A short presentation by Brian Bowie to a business luncheon)

In the previous century and in this one, I’ve seen a lot of people attempt to start businesses on a shoestring or less. Some of them succeeded. Many of them didn’t.

Even those who tried to do everything right struggled. And many of them gave up. And the reason is – if you try to start up on a shoestring, chances are you’ll be tempted to sell or mortgage that very shoestring to pay the rent.

Good businesses require some form of investment to get started or to grow.

Think about how much you invested to start or purchase your business.

How much extra have you invested since then?

Are you getting a good return on that investment?

Would an additional investment enable you to take your operation to a higher level?

In other words – Who would like some more money to build their business further?

You asked me to speak to you about grants.

Let me ask you – Who is not paying for lunch today?

Who has heard the cliché – “there’s no such thing as a … …?”

But even those of us who do occasionally enjoy a so-called free lunch, soon realise that we more often that not pay for it in some form.

Am I saying that there are no grants for business? No. But they are not always easy to tap into, and often there will be a number of conditions attached that could make them far less attractive or attainable than you first might think.

So, who gives money in the form of grants? 99.9% of the time, it’s the Government. Does the Government give away free lunches? Not often. So that means they want something in return. They usually call those somethings “outcomes”. Those outcomes are often determined by various Government policies or initiatives to bring about economic or social development or reforms. Things like youth employment, education standards, equal opportunity, protection of the environment, etc.

So, if you want a grant to establish a wind farm on O’Halloran Hill on the grounds of reducing the consumption of fossil fuels to produce electricity, you might have a chance – as long as you can establish that it won’t adversely affect the visual environment, will create a number of jobs and apprenticeships for young people who all have an equal chance of getting a job with you, and will reduce the number of casualty crashes on the Southern Expressway.

How do you go about getting a grant?

Let’s say you own and run a retail bakery. All your customers like your pies and your cakes and your fruit buns. You pay rent for a shop on a main road with ample parking out front. You had to borrow $70, 000 from your bank 3 years ago to purchase the business from the previous owner who was retiring due to ill health. You employ 3 people part time, you work in the business full time and your partner in life comes in and helps on the weekends. And you’re not making any money.


 

Weekly sales                             $6000

Cost of sales                                3000

Wages                                          980

Rent                                              800

Power & phone                               250

Other expenses                              500

Personal drawings                          300

Loan repayment                             300

Net profit / (loss) (130)

You’ve found out about a new state of the art automatic oven that would double your capacity and cut the current workload by half, enabling you to cut back on your wages bill and increase your sales at the same time.

The oven costs $25,000

Where can you get a grant to buy it?

Answer: I don’t like your chances.

You’re not likely to fit the criteria.

Governments are not in the habit of handing out money to prop up struggling businesses.

So are there any other options open to you?

Maybe

Who else gives out money?

Banks.

If you are willing and able to put a viable proposal to your bank, they may finance the new purchase.

You would need to show a business plan that demonstrates your cost savings and expectations of higher sales.

Equity investors

Sometimes it is better to own a piece of a successful business rather that all of an unsuccessful one.

If you can find someone who is willing to invest some cash into your business in exchange for part ownership, you may both benefit in the longer term.

Not only might you begin to make profits, but you may increase the value of the business, thus realizing a capital gain when or if you sell it.

Your Customers

Look at that business plan you put together three years ago when you first took over the business.

Look at the information you’ve gathered over the last three years about your customers. Their likes and dislikes; their spending habits; their appreciation of your good service etc. etc.

Do a customer count and “average spend” analysis.


 

Sales per week                        $6000

Customers per week                 1500

Average spend / customer             $4

 

If you can find a way to build the average spend to, say, $5 for the same number of customers, your weekly sales will grow to $7,500. Your additional cost of sales would be $750, leaving an extra $750 on your bottom line.

What if you not only increased the average spend, but also increased the number of customers by, let’s say, 10%.

That’s another $750 in sales, increasing your bottom line by an additional $375.

Even allowing for a few additional costs here and there, you could now be putting close to $1,000 a week (or $50,000 a year) in your pocket. Suddenly, you have a tax problem.

But if you can soldier on for a year at this level, you may decide to purchase the new equipment outright and lift your sales even further. Or you may finance it through a bank loan, overdraft, or lease agreement, using if necessary, some of the accumulated cash as collateral.

Summary

Philosophically, you should only put money into a business if it is going to return a positive dividend.

Over a number of years, I’ve seen many instances of good money following bad.

I’ve seen people dip into their savings, retirement funds, borrow from family, borrow from banks, sell assets, take second jobs, … just to prop up their ailing businesses.

I did it myself once – until I listened properly to my mentor at that time. His advice was simple. Clear your debts and close the door.

Putting more money into a failing business is just as bad as playing the poker machines. You won’t get it back, and you’ll never get in front.

 

But putting money into an operation that has potential for growth makes good sense.


 

 

 

 

 

 

 

 

ã Copyright 2008 Active Business Systems Pty Ltd                        Last updated 18 December, 2008