This is the first post in a series on funding small and medium sized businesses; first-hand accounts from people who have been through it from knocking down SBA loans hurtles, to how venture capitalists and private equity partners think, to what’s new in getting an old school line of credit.
In this one-on-one, I spoke with Michael King, serial entrepreneur. He’s currently a Regional Sales Manager with Ftrans, helping small business owners finance their growth opportunities with accounts receivable financing.
The small business owner is an American icon. All kinds of Americans dream of owning their own business. How did you get started? What personally lured you?
When I started in the importing and wholesale distribution industry in the mid 80’s, going to China and India and Asia was exotic and different and not that many people did it. From about 1986 to 2006 I was involved in importing products for the home, seasonal decorations and gift products, eventually owning two businesses in that space. We sold to independent retailers and to major big box retailers as well. We hired designers, went to factories in Asia to make our products and sold them to retailers in America.
I’m interested in hearing more about the business you started from scratch. Looking back, how well were you able to predict your cash needs?
Having gone through the ups and downs of owning a business before, and successfully handling it, I thought, with the right partners, we could grow to a decent size. Our target was $1 million in the first year which we reached.
In that industry, even with a lot of experience and very competent partners, you have to find the right product and get in front of the right customers. Product lifecycles last maybe three years. It’s almost a fashion industry. You might have $6 million in sales one year and if you don’t guess right on a trend, your sales might be $1 million the next year. When you start out, you plan for the worst case scenario –and the worst case may actually be selling a whole bunch. You’ll owe a lot to your vendors for inventory and you can have your cash all tied up in accounts receivable.
You bootstrapped this business. What was that like?
They call it bootstrapping because you’re pulling your business up by your own bootstraps. Even with an industry reputation, if you want your business to stand on its own, you have to prove that you have the management skills, the need and the collateral in the form of receivables to be able to get lines of credit.
Starting out, to get us through the first six months, I used my own money. I used credit cards. I went to my family and I was fortunate enough to get some money there. My other partners did the same. But to fund the business cycle of buying inventory and selling it to customers on account, we had to get our vendors to let us pay on terms, too. We had a track record and a bit of a reputation in the industry that helped as well.
After about six months, we’d had good results and at that point we were able to use our AR to get financing with Ftrans. That worked for us because in addition to getting access to capital more quickly, Ftrans took over many of the administrative burdens of managing our receivables.
What were some of the decisions you made early on that you think had an impact on your ability to be successful?
We planned big, but we tried to keep internal costs variable. Using outsourcing is a good way to do that; we used third party warehouses and accounts receivable outsourcing. Try to be as efficient as you can. Empower the employees you have with the right technology so you get the most out of a few employees. You try to maintain as much flexibility as you can from a cost standpoint so that you can maintain your profitability at whatever sales level you hit.
Experience is important. It pays to know who is going to buy your product, how to talk to them and to know what their needs are. If I didn’t have certain skills in my own skills set, such as design or sourcing skills, for example, I was willing to bring in partners who did.
I always hear about small business owners who are constantly scrambling to find cash. How were you getting stretched cash wise?
The industry normal is net 30 days and they don’t get too worried about paying you for 45 days or so. My DSO was 47 to 50. Target demanded net 90 on new stores and net 60 for established stores. I‘ve heard stories of retailers demanding even longer than that. It helped that one of our partners was well known by one of our big vendors and they sold to us on terms. It was like an interest free loan.
You mentioned that some of your capital came from family and I’m curious about that. Was it in the form of a loan or as an investor? What would you tell someone who was going to invest with a family member?
Well, you have to be very careful about that! In my case it was in the form of a loan. Fortunately, I was able to pay it back. Obviously, you take a lot of risk in damaging your personal relationships in doing that type of thing. It wasn’t a ton of money, in my case, but it was some money and it was very important. Obviously, if you can find partners or get debt financing, I would always suggest doing that before approaching family members or friends. Personal relationships are too important to ruin over some type of business venture and I’ve seen it happen.
If someone in your family approached you and said “I’m starting a business and I’d like you to invest.” As a former small business owner, what would persuade you to invest?
It would be more now than it used to be! I realize what is needed in terms of properly managing the financial side, having good internal cost controls and financial skills and savvy. Not just having a good idea with market demand and a differentiating competitive advantage, but the ability to run the business side of it. And I wouldn’t give more than I could comfortably lose.
Was there ever a time when you thought, “This is not going to work?” When it became a real gut check? What did you do?
I went to my vendors and tried to get better terms. I always tried to be respectful and keep a mutually profitable relationship with my vendors, but I explained that it would help me grow my business and help my loyalty with them. Sometimes you have to not take salary yourself. There were times I did have to reduce staff. There were always hard choices.
There’s nothing like real life business experience. If you planned to start another business, what did you learn from your initial experience that you would always have in mind?
I would look at private equity or the angel environment and try to get bigger faster rather than relying on retained earnings or debt to grow the business. I wouldn’t try to do it all myself. I would be more careful about picking a business with strong margins, smarter about analyzing competitive pressures. I got in the import business because I liked to travel and I did a lot of that. I lucked into a way to make money but I don’t think that space exists now the way it did then.
You think you’d ever start another business again?
Absolutely! I plan on it! I’d definitely be an entrepreneur again. I liked wearing a lot of different hats. I don’t know about the stock market being the path to retirement. I’m probably going to have a couple of small businesses that are running well. I come from a family of business owners; it’s in my blood a little.
More on Bootstrapping:
The Art of Bootstrapping
Bootstrapping Your Start Up
Sandra Chesnutt is a Marketing Senior Manager with Ftrans. Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.