Thursday 7 October 2021

Business Startup Tips: Get and Keep Money

These business startup tips are based on my personal experience. I've tried to make them as generic as possible without falling into the same trap that makes most business advice articles useless.

What kind of business?

Every business startup advice article out there talks about business plans and cashflow. And then the need to find and satisfy customers. The basic advice is right, of course, but it doesn't get you anywhere in the real world. It is too basic to be useful, and it's so obvious! If you needed that advice you might reconsider starting a company.

The following tips are unusual but accurate. You might not have seen them anywhere else because most people who write business startup articles haven't started a business. And those who have are probably keeping this advice to themselves. Selfish!

I hope you find the following 5 business startup tips useful. I wish I'd read them six years ago...

Get and keep money

The following financial guidance is relevant, whether you want to start a hipster food van or a unicorn fintech startup.

1. Seek investment, but don't give away your company before you start

Raise funds from banks and government enterprise schemes, not Venture Capitalists (VCs). Sure, you have to pay back the loans and must do certain things to obtain the grants. But in both cases you keep all of your business. Selling a percentage of your company before you even start (giving equity) seems a shame. It's your life's work, in some cases. You've spent years building knowledge and a reputation. Don't sell that for a few tens or hundreds of thousands of Pounds/ Dollars!

And if your business does very well, the stake you sold for a relatively small amount of money will be worth lots more. That's what the VCs are counting on.

The VCs may pressurise you to do things that are not part of your vision for the company. Once they are inside your business it's not really your business anymore. I've heard that private equity investment is even worse. So stick to the principle that it's your business and you keep it all. Pay your staff well; give benefits; whatever. But don't give away shares.

2. Learn to deal with retail banks

Banks have processes for lending money and they can seem illogical from the outside. Unless the bank's employees understand your business, they will be uncooperative. Want to start a sandwich shop? If they are hungry when they read your business plan they may agree to a loan. If you propose a brand new type of business, like a cybersecurity testing company for example, their heads will explode.

A banking leader once told me that his ideal staff member would lack ambition for change. That's the sort of attitude you are having to deal with here. It's also why challenger banks are doing quite well.

Real example #1:

Entrepreneur: "Please lend me £75K. I won't take a salary and will live off my £25K personal savings for the next six months. "

Bank: "No, you are not contributing."

Entrepreneur: "OK, then please lend me £75K and I will deposit my £25K personal savings into the business account. By the way, I'll draw a salary of whatever I want from day one."

Bank: "Done!"

Bonkers, but an example of how you need to tick their boxes, no matter how non-sensical they might seem.

Real example #2:

Entrepreneur: "Please lend me £75K to start a company that will test cybersecurity products. Clients will include Microsoft."

Bank: "No. Having Microsoft as a competitor is too risky."

Entrepreneur: "Microsoft will be a client, not a competitor."

Much time, head-banging and many further conversations later...

Bank: "Done!"

The lesson

Be patient but persistent with the banks. They are old, stuck in their ways and can't help it! Also, take your bank manager out for drinks, dinner and show him anything you've built already. It definitely helps.

Your bank manager can be your best friend. Some roles in banking involve giving loans. Others are designed to block lending. These people compete internally. Get the right one on your side and you stand a chance. They'll even buy you drinks once you succeed, because they won their internal battle. You don't see insight like this in the business advice books, do you?!

Bonus business plan tip

How do you write a good business plan? You don't! You write multiple business plans. 

What your bank needs to see is different to the document you need to convince your life partner that putting the house up as collateral is a good idea. And the document you need to show potential business partners and other collaborators is probably different again. 

A business plan is a sales pitch and you have different 'customers'.

3. Debt can be useful but not always

If you need to buy things or pay people then borrowing money makes sense, particularly if you have potential customers queuing up. You need to move faster than it would take you to save this money, so borrow it. It's not the same as buying a new sofa - save for that. Credit when building a business can be sensible. But despite what your bank advises (and they will always advise that debt is good), debt makes little sense if you can afford to pay it back and the money is sitting idly by.

The interest on business loans is much higher than you will get on savings. Today you'd be lucky to get close to 1% interest on savings. Business loan rates can be 5-6%.

If you have a good cashflow and can afford to pay off your loans, ask the bank to reduce the loan's interest. After all, cash is king and it's useful to have good reserves. If they don't reduce the interest, pay the whole debt back. Or a big chunk of it. They lose.

You might need to borrow again in the future and, if your business is doing well, you will be able to. The bank won't take it personally that you paid back your previous loan. They might even see you as a good risk. Don't hold onto borrowed cash reserves. It's too expensive.

4. Handling foreign trade

I wish someone had told me about this before I started! (Americans can skip this one.)

If your clients are in different countries, standardise on billing in US Dollars. It's easier for them, which makes becoming a supplier easier for you.

You will most likely start out with a bank account that holds local currency. For me that would be British Pounds. You might live in a Euro-based country, so you'd have a Euro account. And so on.

Here's what happens if you're not careful. US Dollars will come to your account and the bank will conveniently convert them to your local currency - using the worst possible exchange rate seen on the planet. There is no excuse for this. They are taking advantage and you are letting them.

Third-party currency exchange services will work with individuals and even the smallest of businesses to convert Dollars to Pounds, Euros or Yen at much more competitive rates. You have two main choices:

  • Set up a US Dollar account with your bank and have clients pay into that. Then, when the rates are in your favour, transfer to the foreign exchange company. It converts this money to your local currency and deposits the funds into your regular bank account.
  • Use the foreign exchange company as an intermediary bank. Your clients pay into this account and you convert and withdraw local currency when the rates suit you.
I recommend the first option because you may want to change to a different foreign exchange company in the future, which would involved contacting all of your clients' procurement departments with updated details. You don't want that and nor do they.

Your bank may provide a foreign exchange service. Compare its rates to a third-party company. You can negotiate. They want your business and even the good rates are still worse than the rate the banks give each other (the interbank exchange rate). When you use an online currency convertor you're probably seeing the interbank rate. You'll never get this rate.


So to summarise, keep 100% of your business by raising money you can pay back; understand that the banks are run by people (who can be fallible and/ or helpful); and reduce debt when you can. And never let your bank change money for you.

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