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Don't Finance Your Start-Up For Failure

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Simon Cooper

By Simon Cooper

Res Socius

I thought I’d grab your attention with a snappy title. However, I do not believe I’m far off topic on this one. It is also another good reason to buy an existing business for sale that’s already firing on four cylinders. But that’s another subject. This time I want to emphasise the dangers of over-optimism.

Please don’t get me wrong on this one. I’m not having a go at innovation or trying to dumb it down. It’s just that, like a Maserati sports car, optimism needs managing, too, and given its head only when the circumstances are right.

  • Don’t Borrow – Gearing is a great idea when a business is already up and running, and can afford to service debt.

However, financing a sure-fire business plan by borrowing from a lender becomes a disaster when it fails, and you find you have pledged your home. Moreover, the struggle to find money to settle pressing debt can overtake all other good intentions, too.

That is why it is so essential to plan in terms of high road, low road and something in-between road. Believing your business plan could rocket to success is great. However, it can be a terminal idea when the highway turns out to be a dead-end street.

Use Own Cash – In my experience, the acid test of any business concept is whether the entrepreneur is prepared to invest in it personally. And by that I do not mean mortgaging the house or pledging the second car. I’m talking about using the cash you set aside for a rainy day.

The best and safest way to fire up a start-up without taking personal risks is to begin it as a semi-hobby, and build out as it generates its own funds. The catch is that you seldom know in advance how much money you need to reach critical mass. But then that’s the risk of beginning a new business, isn’t it?

  • Plough Back – No business in start-up mode should be expected to support itself and its owner right away, at least if it is to achieve gearing from its own successes. This time, the message is quite simple. Hands off the cash flow (unless you are a full time owner-employee, in which you could pay yourself a fixed salary the business can afford).

  • Finally, you should never plough the profits into unnecessary spending. Large houses, lavish business premises and fancy cars (back to Maserati’s again) send out mixed signals regarding excess profits, and drain resources unnecessarily, too. Patience is a virtue. Practice it.

And that’s a little like raising children, isn’t it. After the first flush you discover you are in for the ultimate long haul. Finally, they are off your hands and making their own way through life. You just have to hope they turn out to be a good “investment”.

NB: Simon Cooper is a founding partner of Res Socius, a firm authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide management consultancy services. Contact 376-1256 or visit www.ressocius.com.

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