How to secure less than $10,000 financing for low risk start up?

[narobins]

Hey guys.

I've learned quite a bit from reading though these forums, and can apply a lot to what I am trying to do with my business.

I am trying to start an online fishing lure company (along with 1000 other people), but I think I found a niche where I can succeed.

I have been building lures for friends and friends of friends for a year or so now, but because of financial constraints, I have had to buy all my materials at retail costs, leaving me just enough profit to buy a 6 pack later in the evening.

After some research, I have found the manufacturers in China that produce the same materials for the companies I am buying from now, for around 25% of the price I pay now. Unfortunately, my current needs are for 20 pieces/color a month or so, and to get the best pricing I need to order 1000 pieces/color.

With this pricing, I'd be able to undercut my competitors by 25% and still leave myself a 200% profit. This will be a 'hobby' of sorts until it takes off, but I realize I need more out of life than working food service for the rest of my life. With my current finances, and not knowing what my potential sales may be, I can't justify the risk of taking out a personal loan at 15% to cover me, especially if it takes a few months to take off, nor do I think I could get the funding.

My business would be based online, and I would work on orders and business stuff after work, so there is no real overhead costs such as payroll, rent, ect, just my time (which I would not compensate myself for) Every dollar invested would go straight to materials, so in a worst case scenario, I sell off my inventory and break even.

My current proposal to get started would be to offer repayment at 15% of all sales, until say 200 or 300% of the loan was repaid. This way I have flexibility to pay it off as my business dictates, and still reward the lender with a healthy return, all while leaving myself enough profit to reinvest in new materials and products.

Does anyone know of a lending plan that could work like this? Or an alternative that allows me some flexibility in repaying the loan? Or am I crazy and greatly underestimating lenders?

I appreciate any and all advice in advance, even if its not what I want to hear.
Thanks for your time and insight.
-Nick Robinson

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[vangogh]

Welcome to the forum Nick. How much money are we talking about? If we're not talking a lot and by that I mean something measured in the low tens of thousands, your best bet might be to seek out family and friends. You should be able to set up the repayment plan with them the way you want. Family and friends are less likely to be concerned with how the repayment works, since most are probably investing in you. That won't be true of all of them, but it will be more likely. Why not start with the friends and friends of friends you've been selling to?

Anyone else you try to get money from is going to want to set the terms. You'll need them more than they'll need you and so they'll get to set the terms.


I'd be able to undercut my competitors by 25%

Be careful about building your business around the idea of costing the least. That can be risky for a small business, since someone can always (and eventually will) figure out a way to sell for less than you do. There's no reason your competition can't also get materials from China. If the reason people buy from you is price then when someone else charges less, guess where they go.

It's not that you can't sell for less, but make sure there are other reasons why people buy from you. Playing the price game can be dangerous.

[narobins]

Thank you, vangogh.

Unfortunately, most of the friends I am selling to are not in a financial position to loan much money, and frankly, I'd be embarrassed to ask. I may have to go that route though. Being on the business end of it, does that initial plan seem reasonable to you? Is there another way you would suggest paying back friends and relatives? If I do present something to them, I would like to have a specific plan in mind beforehand. I have both borrowed and lent from friends before, and things just seem to get uncomfortable for both parties until everything is square.

I could start it with very limited inventory for around $1000, but I would only be offering a few sizes and colors. My supplier has over 150 colors, and I would like to be able to stock as many of those as possible before officially opening my business. The last thing I want is someone to look at my site, only see a few options, and write me off forever because I did not have what they needed. Ideally, I'd need around $7,500-$10,000 as an initial investment.

As for playing the price game, I do understand that I cannot compete with big brands (Pline and Boone would be my main competitors). Their volume would put mine to shame. My hope is my lack of overhead costs would give me a competitive advantage, at least for the time being. Also, both those companies do import from China, and the manufacturer I have been talking with actually supplies to one of them.

Even if I match their pricing, my grand plan is to offer more options than they do, in color and size, to become the first and last stop for customers looking to purchase my products. That's how I would build loyalty, by offering more options than my competition. Instead searching through dozens of retailers to find the colors a customer is looking for, it would be known they are all available from me.

Also, I would also be using these to build larger products (to mimic a school of fish), which to my knowledge, neither of those companies do.

Again, thank you very much for the advice. I may have to try tapping into friends and family, but I would much rather secure funding on my own.

If anyone else has thoughts or opinions, please feel free to share. It truly is appreciated.

-Nick

[BP Writer]

In terms of the competitive advantage you will have over your competitors, you say you will offer a broader selection of lures. I know diddly about the fishing lure industry, but my spidey sense says that a larger, well funded competitor with market penetration is probably in a much better position to do that than you would be. So why haven't they? And how easy would it be for them to expand the variety of what they offer should they decide to? A bigger issue is this – how are you going to get enough people to your site in order to increase your sales/color/month from 20 to 1000 (or 500, or 200, or 40)? You say “low risk”, but if your primary sales channel is a web site, and you can't attract enough visitors to drive sufficient sales – I can easily see boxes and boxes of materials languishing in inventory (and for me it would be “deja vu all over again” because I have seen such boxes more than once).

But you did write some magical words - “...which to my knowledge, neither of these companies do” - a product that people want, but isn't currently available – maybe that is where you should focus.

As far as not feeling comfortable asking family/friends for the money – I completely understand...but I can also tell you that most successful entrepreneurs push past that reluctance because they have such a strong drive and passion for their vision, and confidence that they will succeed. The flip side to that is most people won't invest/lend unless you have that kind of vision and confidence. So my advice is to keep working your ideas, keep thinking through all these issues – until you come up with a plan that you feel so strongly about that you are willing to do those things you would normally not do. That would be a good sign.

[KHooten]

BP Writer definitely has some valid points.

OP you sound like you have put a great deal of thought into this, however it does seem like there needs to be some additional planning. For example, as BP stated,
well funded competitor with market penetration is probably in a much better position to do that than you would be. So why haven't they? And how easy would it be for them to expand the variety of what they offer should they decide to? There probably is a reason why your larger competitors are not selling particular lures. That's something I would check into.

However, that's not to say you shouldn't try to follow through with your business idea. I just know from personal experiences that lack of planning can cause you to fail miserably. I have (too many times) gotten excited about a business idea and went full throttle with it just to see it fail simply because I jumped in before putting in the necessary planning to make it succesful.

As far as financing goes I try to stay away from borrowing money from friends and family because that can become a very hairy situation. However, if that's the only way to make your dream a reality sometimes you have to do what you have to do. Have you checked into obtaining and unsecured line of credit? Depending on your credit you may be able to get a $3k - $5k unsecured line of credit to help fund your business. You probably wouldn't be looking at a very favorable interest rate but with a line of credit you could take out cash in increments instead of taking out a larger loan. So you could take out say $1,000 and if you were able profit or see results from that then you could work from there.

[BIZDEV]

Have you looked into peer to peer lending sites? That might be your best option for a loan of about $10K. You don't even need great credit (although it would help get the better interest rates).

[vangogh]

I was thinking the same thing about having a broader selection as a competitive advantage. That is the domain or larger companies. Larger companies have more resources. Their advantage is in the broader selection and the lower prices.

Why not instead find a specific part of the overall market that isn't being served? is there a type of lure that's harder to find? Can you make a better lure for certain kinds of fishing. Try to stand out for something with a smaller market and be "the" go to source for that smaller market. As you grow your customers you can expand into other things they might also buy. Once they come to you because you're the best place to get lure x, starting selling them lures y and z.

[tmerrill]

As far as the peer to peer lending sites for America, you should look into LendingClub.com and Prosper.com. Depending on your credit you can obtain a loan for relatively good terms. I got a loan from prosper. You can read about my small business loan (http://www.solosmallbusiness.com/small-business-loan/) experience here.