4 Things I Wish I Had Known About Financing

  •    Anne is a marketing consultant who specializes in content strategy. Before becoming her own boss, she led the marketing team for a Fortune 500 brand.

Entrepreneurs need to learn the ins and outs of nearly every aspect of running a business — and fast! What better, safer way to learn than from other people's mistakes? That's why we've launched this new series — “What I Wish I Had Known" — to share lessons that successful business owners have learned through experience. We hope their advice prepares and informs you for your own entrepreneurial journey. And, if you missed them, check out the first two installments of this series: 6 Things I Wish I Had Known About Building a Website and 7 Things I Wish I Had Known About Prototyping.

When it comes to financing your business, there are many factors to consider, and you'll likely evolve your financing strategy from when your business is first opening its eyes to its first wobbly steps to when it's about to graduate high school. And that's okay, even to be expected, which brings us to our first lesson.

Lesson 1: The way you finance your business may need to change.

“There's no wrong decision [when it comes to financing], just different paths," says Weebly customer Lauren Lutchna, co-founder of Farmstead Apothecary, a company that sells natural and organic body care. As a self-funder, Lauren acknowledges that slow and steady can be the perfect situation for some, while others may need to take out a loan or seek investors.

Weebly customer Caesar Chu, who founded The Original Whiskey Ball Co. in 2010, is a prime example of someone who self-funded early on, but later sought outside financing help in order to grow. During a trip to Asia he became fascinated with the “beautiful ice ball" in his scotch on the rocks. He found out it took a giant copper device that cost $2,000 to make it and saw an opportunity to create a low-cost option for the mass market.

Whiskey Ball Homepage

“My initial investment was $1,000 to produce my first batch of 100 units. I took profits to buy 200 units," he explains. “After I sold 200, I would order 500, and then 1000, then 5000, and so on. Profits were just rolled back into buying more inventory." But after his second year in business, his wholesale orders dramatically increased, exceeding his funding capacity. So, Chu took out a line of credit that he could easily access and pay back early without penalties. “This was instrumental in helping us grow in the early years," he says.

“Just make sure your financing aligns with your long-term and short-term goals. Did you start a business so you can be your own boss? Then maybe an investor wouldn't be right for you," Lutchna advises.

In a nutshell: Spell out the reasons you wanted to start your business as well as your long- and short-term goals. This can serve as a guide when considering the best way to finance your business, whether through startup loans or alternate financing methods.

Lesson 2: Avoid financial risk through savvy early testing.

While Chu was especially excited about creating ice balls for at-home drinks, he wasn't sure if consumers would leave him hanging, hand in the air for a high-five that would never come. So, he started scrappy and without any unnecessary extra expenses. He could have rented a warehouse, for instance, but instead operated out of his garage for three years — that is, until the HOA sent him a notice to cease and desist running a business out of his garage.

Whiskey Ball Order Packages

“The first few batches had no packaging, just a silicone rubber ball in a plastic bag," he says, explaining that he sold early versions of his product via an online retailer to further lower his costs while testing the market. "As I proved out demand, I improved the product, marketing and packaging."

Like Chu, Weebly community member Carmel Coffey, co-founder of FarmLighting.ie, and her husband chose to forego traditional brick-and-mortar retail routes when they discovered a market for LED lighting for farm buildings and farm machinery. Instead, they sold directly to online consumers. During this process they also discovered ways to start out cheap without compromising what's important. For instance, they bought directly from the manufacturer to avoid higher distributor prices, registered their business and domain name themselves, and sought out freelancers for small jobs like creating their logo.

FarmLighting Homepage
“This gave us the opportunity to see if the business would have traction without much financial risk. Plus, the free options still work great," Carmel says.

In a nutshell: Before investing too much of your own (or others') money, test the market and identify ways to save money in your regular operations.

Lesson 3: Have a plan for your first watershed order.

When Farmstead Apothecary got its first order from Whole Foods, they didn't have to take out a personal loan or a line of credit to fill the order because they had looked ahead.

Farmstead Apothecary Homepage

“We didn't have any extra expense when we started with Whole Foods because we had already built up inventory to go after big fish like that," Lutchna explains. By doing this and saving up for any extra expenses, Lutchna and her husband prepared in a way that didn't require them to take on any debt.

Another proactive tip comes from Chu. He points out that even if you don't need it now, you should start look for inexpensive and accessible lines of credit or low interest loans to keep in mind for financing of large purchase orders in the future.

“Take advantage of 'cheap money' before you look for an investor," he says. “If you have good credit, you could even consider taking advantage of those '0% APR for 12 months' credit card deals and unsecured lines of credit."

In a nutshell: Prepare whatever inventory you can and have an idea of how to get any addition financing you may need before going after big sales deals. That way you can avoid needing to find an investor quickly in order to fill the order and not lose business.

Lesson 4: There's two sides to the self-funding coin.

Self-funding gives you the most control — but also the most responsibility.

“You don't have to consult with a partner, allowing you full creative license," Lutchna says. “There've been countless crossroads and times that we're grateful to not have to consider another person's input." Coffey agreed.

“Because we self-funded we can react quickly without consulting with partners. It allows us to set our own culture and to use strategies that work for us and our lifestyle," she says Coffey. “In any case for me there is nothing better than being your own boss." On the flip side, though, that sole responsibility can take its toll.

“We funded our company ourselves by keeping our full-time jobs and sleeping much less. We sleep less and less as our company grows," Lutchna says. “As the business thrives, there's more and more to do, and we just have to figure out the most efficient way to tackle our time issues before we dive in and start working."

Chu points out another challenge to keeping investors at arm's length: “You may grow more slowly because it's more challenging to handle large retailers and distributors. If you can't service all your new business, you could lose it forever to competitors."

In a nutshell: Each entrepreneur agreed: the main advantage to self-funding is that you don't have to answer to investors – you have full autonomy. On the flip side, you have no investor to offer their guidance and businesses connections or act as a sounding board.

Proper financing strategies can make or break your business as it grows, and the best strategy depends on your plans for how, when and how quickly you want to expand your business. You may make mistakes along the way, but look at those setbacks – even failures – as learning opportunities.

“Learn as you go, especially because your industry is likely evolving as you go. The mistakes we've made have made us more knowledgeable and more equipped to make future decisions," says Lutchna. “I'm glad we've had ups and downs while we're small and have our jobs. Those small mistakes are recoverable, and what you learn from them is invaluable."