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Running Out of Money after Starting-up

November 12, 2006

Q- I started a business out of my house which was very successful. About 4 months ago I opened a retail location paying $2500 a month in rent with a 36 month lease. The rent is for a great location and the store is ideal. I borrowed the money to start the business but now find that my startup funds are inadequate and I do not have the money to pay for my lease payments or my staff. Revenues are increasing but are still not enough. I have good credit and am considering a bank loan of $50,000 using my house as collateral. Does this sound reasonable to you?

Not having enough startup money is very common. However, while common, it is not a good problem to have. Debt is often used as a remedy, but starting a business with debt is not an ideal strategy. As you are required to make payments regardless of your cash flow, funding with debt leaves you with no recourse when times are tough. It is best to get as much equity as possible when starting a business to ensure that you are free of fixed payments.

In your situation, the first thing you need to do is determine whether your business is viable. The fact that the business worked when operated out of your home is not necessarily a guarantee that it will be successful in a retail location.

Usually, four months is not a sufficient amount of time to truly tell if a business is viable, but there are indicators that you can look for. You will need to watch your revenues very carefully. If they are increasing every month, it is a good sign that things will probably get better.

Assuming that the business is viable, my recommendation is that you go to your landlord immediately and explain the situation. See if they are willing to reduce your rent or defer payments until a later date. As you are currently short of funds, this could give you the breathing room you need to acquire new funding sources. Most landlords are willing to work with you if they know they will eventually get paid.

To acquire new funds now, I would strongly encourage you to resist using debt. As an alternative, I would recommend that you try to get some angel investors (wealthy investors) to invest in your business by buying some equity.

If you cannot raise equity, you will have to raise debt. So long as it is not short term, bank debt is a good alternative. Debt with a maturity of 3 to 5 years is ideal as it spreads the payments over time leaving you with much lower payments. Shorter terms impose too much risk on your business.

While you are in a critical situation, most businesses experience similar issues. If you can manage it, avoid debt and opt for equity instead.

Good luck!