There are no shortcuts when it comes to getting out of debt.—Dave Ramsey
Cut your coat according to your cloth
It may seem like an obvious advice but— Capitalize only to the extent necessary! While you should have adequate capital with a healthy operating cushion (to take care of unforeseen factors/contingencies) – the temptation to overcapitalize and borrowing more should be avoided. Overcapitalization may increase your borrowings and increase your interest burden.
New entrepreneurs during the start-up phase can avoid buying land and constructing buildings – they can instead work from leased premises or factory sheds.
Major plant, machinery, and equipment can also be leased out to save on initial capitalization cost. Entrepreneurs can also work from a well-established and recognized incubation centre to start with.
Entrepreneurs may also resort to bootstrapping during the start-up phase. Bootstrapping is a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when he/she attempts to found and build a company from personal finances or the operating revenues of the new company. Bootstrapping helps an entrepreneur conserve funds (cash) till he/she reaches the stage of external funding from the Banks and/or DFIs.
It is a well-known fact that many entrepreneurs fail or are forced to exit from the business during the initial period of risk— which may vary from few months to 2-3 years! Bootstrapping is an excellent concept to insulate the entrepreneurs against such risks.
Once the entrepreneur has crossed the initial vulnerable period of risk and uncertainty and has learnt the art and science of doing business and handling money, they can always plan to build their assets and terminate all lease arrangements in stages.
Don’t be miserly. Be financially frugal!
For an initial period of 2 to 3 years – you, as an entrepreneur, must be very critical while spending money – your own money or borrowed money. Even after 2 to 3 years when your business is well established and is running well – it is nice to remain financially alert, frugal, and prudent. I am not suggesting that you be a miser and/or have a narrow focus or short-term perspective of things. All I want to say is that you must always do the necessary cost-benefit (either a quick verbal check or a structured study) of any aspect, offer, or proposal before making any financial commitment. The application of the cost-benefit concept should not be limited to only fixed assets. It is a versatile concept and should be applied in all situations whenever and wherever a cost is involved.
Always ask – What is my cost? What benefit do I get?
Any business or project must be adequately funded with a judicious mix of own (equity) and borrowed funds (debt). The equity portion will comprise the contribution of the promoter(s), investments from relatives, friends and associates, few private placements, and from the public if a public issue was envisaged. The debt portion can come from many sources like term loans from national level banks and development financial institutions, SFCs, SIDCs, and many more sources including international institutions. The main promoter must have enough means to mobilize his contribution to hold a worthwhile stake in the business. S/he may do so through the support of his family, friends and associates as indicated above. Additionally, the promoter may also approach angel investors, private equity firms, and venture capital funds for support.
A word of caution
And finally, before I end – a piece of advice to all those qualified professional entrepreneurs who resign their cushy jobs to enter business and land into a trap soon – only and purely due to their over-ambition to grow fast and becoming rich overnight. They borrow heavily out of sheer enthusiasm to take advantage of higher financial leverage and consequent quick growth – most often – to land into trouble. Such entrepreneurs, apart from paying higher interest on their huge borrowings also lavishly spend on swanky offices, cars, overstaffing, advertising, promotion, and other items.
Most of the times, many such expenses are not justifiable when you look at their original business plan – but then these are done because of lifestyle reasons or the ego of the main promoter/ entrepreneur. Whereas there is no harm in building up all such expenses if these follow the original business plan and can be absorbed in the projected cost of production. Expenses that result in improvement of the value chain, can offer a competitive advantage to the firm, and result in improved bottom line through higher value addition should be welcome.
One must however exercise adequate caution against random and unplanned (at times – arising from whims and fancies of the entrepreneur) expenses which only erode the bottom line.
Do you have a habit for spending money that you do not have?
Are you planning to borrow to acquire some assets? How about the interest you will be paying on these borrowings? How long will it take you to repay the entire loan? Are you comfortable with these questions?
Most importantly — Are you trying to fit in your lifestyle with that of others?