A LETTER FROM A WEB DESIGNER
My friend and I started a business last October and we’re having problems because we keep running out of cash. We’re importing European products directly into the U.S., very fashionable and at a very good price for our customers. Rhonda, my friend, is gorgeous and has a great sense of fashion. I’ve been a successful retail store manager for a big chain.
Rhonda has a very high profile, married boyfriend. He’s our investor. So far, he’s loaned us $400,000 and he’s charging a very reasonable 8% interest on his investment. We’ve got a great location with a two-year lease in the trendiest area in town.
Our investor and Rhonda travel to Europe to buy inventory every month. The problem is, we’re losing $40,000 a month. We’re supposed to have $75,000 in reserves but that’s never been deposited. Instead, I go to him every month with our bills and he’ll write out a check to cover them and pay our salaries.
We’re not bringing enough customers in the door. The company I used to work for did a lot of advertising and it really brought people into our store. Our investor says he doesn’t believe we should advertise because our products are high priced and very exclusive. He won’t give us the money to run ads. He owns a very large, profitable company with almost 100 retail branches and also sells his product through major department stores. He advertises his business. Should we advertise? And if so, how can we do it without a lot of cash? We got in touch with Tod at . They suggested we should start focusing more on SEO (search engine optimization) What are your thoughts??
Sleepless Over Cash Flow
We sympathize with you and your partner but we certainly don’t envy your situation. We usually advise people starting businesses to start with the 3 Fs, Family, Friends, and Fools. Your partner’s friend is certainly no fool with his impressive business success, but he may be playing her (and you!) for one.
When you are working with the 3Fs, it’s really important to know what everyone expects from the deal. The 8% interest on the loan is a very sweet deal but it’s tied up with having to go ask Sugar Daddy for your allowance every month. Enough of that, and you’ll be the one with the sour feeling.
How seriously do you take this business? Since BigShot is suffering from intermittent “tight wallet” syndrome, you and your partner need to assess where you are right now and what you need to succeed. You’re going to have to tell your partner this: “I don’t want to hurt you or your relationship with your boyfriend, but this is a business. You’ve got to make your decisions based on that.” If she doesn’t take this seriously, you’re dead in the water. Find yourself something else to do because this business will never make a dime.
The bottom line is that your partner, the girlfriend, risks this relationship. He’s got pretty good reasons of his own for playing this game. It keeps her under his control but gives him those great trips to Europe with her. He may be shy about advertising with web design agencies because he doesn’t want his wife to find out that he’s an investor.
If she is serious about succeeding with the business, though, you need a change of game plan. You can’t go on month-to-month making up the shortfall with your investor. This is a tax-deduction for him (click here to learn more), but he’s also treating it as a hobby business that he can pull the plug on at any time. The best protection for you is to have enough cash and credit available to get the business past the breakeven point. Plan your business needs, including advertising and other promotional efforts.
Hire an attorney for the business to advise you.
Have him or she examines the contracts and explains your rights and obligations under the contracts.
Make a list of everything that can hurt you if the investor pulls out of the agreement. What will it take to make it without his backing?