09 Oct So You Want to Be a Fashion Entrepreneur: Let’s Talk Money – Part 1
Welcome to the third post of “So You Want to Be a Fashion Entrepreneur”- an exclusive blog series for All Things Fashion DC that takes a closer look at the Entrepreneurial Mindset needed to create a successful business.
by ATFDC Guest Contributor Evelyn Bandoh MPA, MST, RFC
It’s important to understand that money is not your first consideration. The first thing that you want to be concerned about is that you have an idea, product, service, innovation etc, that has the potential to solve a problem, make a change and generate revenue now and in the future. You want to think about issues of scale (how can I multiply what I do) and how you will meet demand from clients/customers.
Remember this: Entrepreneurs scale, self-employed people work ® Evelyn Bandoh
After you are clear on what you are trying to do- start identifying how much money you are going to need to do X. This requires you to sit down and complete a start-up budget and a straightforward operating budget. Some questions to consider:
- What I do I need/want the money for?
- How soon do I need the funds?
- Do I need to money for basic start-up expenses, to expand, or to perhaps fund a program or project?
- Am I willing to go into debt (loan- financing) or give a way a piece of ownership (equity financing) in order to have access to cash flow?
- Can I bootstrap my startup?
- If in business, have I exhausted my ability to bootstrap the growth of my business?
- Is my business a good candidate for financing/investment?
It’s also important to understand the sources of where your funding may come from:
- Self (that would be you),
- Bootstrapping (investing profit back into the business),
- Equity (friends, family, fools and venture capital),
- Debt (loans, credit), and
- Grant Proceeds (business plan competitions, specific industry grants)*
- Tangible resources and social capital (sharing space, bartering goods and services etc).
The type of business you start (or are operating) will determine how much money you need and where you might get it from. Retail businesses are “capital intensive” because they can require a significant amount of money to launch (especially when it comes to leasing and renovating a physical location and securing inventory) and need a significant amount of cash flow to stay operational. Service based businesses often have minimal startup costs and are easier to bootstrap. BUT beware, if you are service provider- you too have to be mindful of cash flow (sometimes clients may not pay for 30,60, 90 days)- and often times when you are on a client engagement- you might have to foot the bill for your expenses and wait to get reimbursed. If you don’t have enough cash on hand- your business may be dead in the water. If you want to avoid debt, cash flow is something that you will have to take into consideration and plan accordingly.
In terms of finding money:
- A lot of money will come from you. This is called bootstrapping- where you take any of your profits and reinvest that into the growth of your business. You will also take your own money and invest it into the business. Your own money may be cash or personal credit (see below). This is one reason why many people keep their day jobs while growing their business. There are these annoying little things called food and shelter that are very necessary to the human existence.
- Family, Friends, & Fools: The initial source of outside money will probably come from what are called the three Fs- Family, Friends & Fools. Some contributors will give you money with no strings attached. Other contributors will give you money in exchange for an equity stake (a piece of ownership) in your company. Think hard about this one; are you willing to give up an equity stake of your company? If so- make sure to consult with an attorney before you do this. The Family, Friends & Fools equation will be rife with problems if there is not clarity in the deal. If things go south, your backers may not be very graceful about losing money. (This is why it’s important to have a good idea of what the heck you are actually selling and why it will make money). And for heaven’s sake- if and when you get money from this source, please make sure to use WRITTEN AGREEMENTS. Verbal is cute- but written agreements bring clarity. Clarity is gold.
- Personal Debt: sometimes it becomes necessary to pull from your own credit cards, take out personal loans and if you own property, borrow against that property (not such a great idea). Lot’s of times, we do this first. There are pros and cons to this approach. My word of advice is be crystal clear in what you are trying to do and set a limit for yourself on how much money you are willing to lose/how much debt you are willing to be on the hook for personally.
- Outside Debt: This involves taking on debt from a financial institution or an individual who is willing to make you/your small business a loan. A couple of things to consider: it’s near impossible for a startup business to get a loan from a commercial bank unless that loan will be guaranteed by another organization. Any loan that you get will most likely be a personal loan if your credit is strong enough. If you take out a loan from a non-traditional source- understand that your interest rate will be higher and the terms may be less favorable.
Now! For every commercial bank that will tell you no, there are several organizations that may tell you yes. Some are regular nonprofits that not only provide business counseling but have a “revolving loan fund” or a “micro loan program” as well. The DC Women’s Business Center has a small loan fund that provides from a few hundred dollars up to $50,000 of funding and Latino Economic Development Corporation (LEDC) also has loan fund as well. Some of these organizations are actually called Community Development Financial Institutions (CDFIs), which specialize in providing debt financing for start-up and emerging businesses. CDFIs have a specific purpose to work with the community and are certified by the US Treasury Department. It may be easier to get a loan from a community-based organization because the underwriting can be more relationship driven than credit score driven and the credit score requirements are not as stringent as they are with a traditional bank. There will be additional requirements- but the requirements are to your benefit and include mandatory entrepreneurship classes and sometimes community service.
Make sure to bookmark this page and visit it on a monthly basis. In the next post I’ll still be talking about the money question and highlighting some creative ways to fund your fashion business. Questions or thoughts? Drop a line in the comment section below or feel free to hit me up on Twitter: @evieb @f3fashionista