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?
What are your investor’s risks if you advertise? Is it more than money?
What are his risks if you fail? If you succeed?
When will the loan and interest be due? You could be in a world of hurt if you’re already in default on it.
Make a list of your assets including the store’s inventory, but also looking at real estate, jewelry or anything else that you and your partner have that might be converted to cash.
Since the lease is in his name, look for backup lease locations if he backs out.
Consider what it will take to bring in other investors. Who do you know that might be interested in your business and be able to help you make it to breakeven?
Arrange for a line of credit.
Once you know what your strengths are, attempt to negotiate fairer dealings with Sugar Daddy. Give him your new business projections-you might want to do it with and without advertising so that there’s a clear difference in the numbers. Ask him to help you get that line of credit, and to kick in more capital to get you to breakeven, including that $75,000 reserve that he agreed to supply you. We know you’ll be uncomfortable asking for so much money, but how does that compare to going back month-after-month to report ongoing losses and ask for that check?
This isn’t a hobby business and you don’t need his permission to make money. Even if he has the lease and the inventory, you and your partner have still got the contacts in Europe and can start over without him if you are both determined to succeed.
You need to get something from your partner as well. Ask her to take you on one of those buying trips and to introduce you to her business contacts. That way, if she’s unavailable for a trip in the future, you can still keep the business supplied.
If you and your partner decide not to confront Mr. BigBucks directly, well…are you sure you don’t want to go back to your previous job? No? Okay. Roll up your sleeves and do some creative promotion on a shoestring.
You can make flyers inexpensively, though we suggest using a graphic artist to help you get a classy but affordable look. You can do your own public relations, although you’ll have to learn on the job. You can rent mailing lists of people who subscribe to Vogue and other fashion magazines.
Consider staging your fashion shows as benefits for charities that have members who’d be happy to buy your products. Ten percent of all sales at a fun, in-store event going to the Children’s Hospital can be a pretty good way to acquaint customers with your business and it’s not out of line with other promotional costs.