Reader Question: How can I start a small business with no capital?

I guess some of my readers appreciate small / online business advice as well as personal finance advice, so I’ll keep the mix going for a little while longer.

On that note, let’s take a look at Jeff’s question; it’s a very common one, indeed:

I have always wanted to run my own business, and I know what business it is. I have planned out all the details, even got as far as making the business plan for startup, short term and long term. But i keep becoming discouraged at the idea when I hit the same wall every time. Which is startup capitol. Do you have any suggestions as to where or how someone who is smart and determined, but has virtually no personal capitol, can get the means to start a small business?

I don’t have enough (any) information on Jeff’s personal financial situation to make any specific recommendations. However, since this is such a common reader question, let me try and answer it for everybody in this situation.

Startup capital almost always comes from the Four F’s:

– Founders – What does your personal ‘balance sheet’ look like? Do you own a house, car, etc. Many a business has been started by refinancing existing assets, borrowing money on credit-cards, and so on. Desperate times call for desperate measures.

– Friends/Family – These two groups will invest small amounts – from $100 to $10,000 each. Pull a few together and you may get enough. Usually, they are investing in YOU, so financial results are less important to them. But, if you have a business plan that reads well, and you have a wide circle, you’re ready to start asking!

– Fools – These are seed-stage investors who MAY invest in an idea, but they are VERY hard to come by. You probably need more than one cofounder (one-man businesses are usually seen as too one-sided), and you will need to demonstrate a business with good upside.

Putting together business plans is one giant step forward for Jeff.

But, now he finally needs to decide if he’s going to drop it, or go for it. Only Jeff can make that decision 🙂

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7 thoughts on “Reader Question: How can I start a small business with no capital?

  1. The other item that comes to mind is that maybe the startup capital in his plan are too high. I see business ideas on a weekly basis (web development is my day job) and often so much $ is wasted in startup. You have even recommended in the past to use a couple hundred dollars to get a website up to test the market and see if you have enough customers to make the business worthwhile. If a friend of mine came to me asking to borrow money for their business, my first question would be “Do you have customers lined up, ready to buy?”

    As a personal example, my wife makes great calzones so I’m going to put up a site promoting them and offer them for sale in large quantities. Once we have our first sales, we will rent space in a certified kitchen to produce them. Once we get sufficient orders, then we will look into a more permanent facility with capital required.

  2. The question was how to raise capital for a *small business*. This is very different from a start-up in the Web2.0 or silicon valley sense.

    The difference is in how you return money to the investors.

    Start-ups hope to go public or be bought some day, and investors usually make money my essentially buying shares (in exchange for their cash) when the company is worth only a small amount, and then selling the shares after the IPO or acquisition. The 4Fs plus venture capitalists are the right source for the this kind of capital injection.

    Small businesses on the other hand very rarely go public or get bought. They tend to be lifestyle businesses that support the business owner and a handful of employees (hence “small”). So how is an investor repaid? Well typically with principal and interest payments – you take out a loan, often a personal loan (secured by your home equity etc). If the business is successful the loan is refinanced into a line of credit secured by assets owned by the business. Sources for such loans are banks and (indirectly) the government (see You don’t really invest in a small business as an outsider, you just spot the founder some money. Which could also be from the 4Fs, but is less common.

    One last point, w.o. wanting to be too much of an a-hole: capital, not capitol, is what you want to finance a business. Errors that are clearly typo-style mistakes such a “btu” instead of “but” are much more forgivable than mistakes that make clear that you don’t have a strong command of written English (e.g., there vs. their, capital vs. capitol, write vs. right etc.). Stuff like this matters if you write a business plan – you want to put you best foot forward and not make someone wonder if you finished high school or not.

    And as karma for writing such a comment, I am sure I have exactly such a error in here somewhere 🙂

  3. @ Jake – You may be right in that it is harder (in the current market) to find 4F’s available for offline small businesses.

    But, the first F (founders) is valid in both cases: you refinance your house, sell your car, take out loans on a few credit cards.

    And, I have seen plenty of small businesses where Friends and Family chip in! Four of my friends bought a cafe together … just because they liked the idea of drinking coffee in their own cafe.

    As for the fourth F – Fools (a.k.a. ‘investors’): why, I wouldn’t even suggest it, if I hadn’t done it myself! I financed a small business (zero online component) in the last 12 months 😉

  4. Adrian, I am new to blogs and ive just stumbled upon yours. I’m reading every topic from the beginning, just completed “Business”!
    Im 39 years old, just got married and just starting to build up my “wealth” again after losing absolutely everything during the past few years…..(was $20,000 in overdraft and credit card debt, not one asset to my name).
    I am a new student of reading “money making” and “self improvement” books and websites.

    I’m currently sitting on a US$500,000 cash pile saved from salary alone. My salary should bring me to a $1million cash pile by end of 2011. Then my job contract ends and I need to find another job which will be way way way way under what I get paid now and I need to make my money work. I am looking for investments but haven’t found the trustworthy advisor/opportunity yet.

    I live in a part of the world where foreigners cant get mortgages and I look at this as a positive because it doesn’t put me under the pressure of my home country to own your own primary property and I have decided that renting is not a waste of money for me at the moment (rent is very reasonable here compared to my home country).
    I also rent a car which is expensive but at the moment want to keep everything straightforward and under control (ie no surprise expenses when the missus damages the car! etc).

    Ill be a regular replier to your topics but to get started my first 2 questions are:
    o Do you agree with my above principles?
    o and THE NUMBER…..correct me if I’m wrong:
    o I choose the salary I would need to live my purpose…ive chosen $500,000 per year.
    o Multiply this by 20 or 40 (am I missing something but where did you get these multipliers from, is this the number of years ill be retired for?)
    o and then add 75% inflation because my date is 15 years from now…what about the inflation lost during retirement day and the 30 years ill be retired for?

    Is that correct?

  5. @ Sly – It’s timely to review the Number calculation for our new readers, so watch for an upcoming post …

    Your best opportunity to get to your Number is to work out how you scored $850k+ in 12 months (presumably you lost about 1/3 in taxes and spent about $100k, leaving you with $500k to add to you existing $500k cash pile) and find out some way to keep doing it!

    Failing that, you’re about 5% of the way in to reaching Your Number, so you will need to start aggressively investing and/or start a business with some serious growth potential in order to get there.

    The good news is that you have a serious pile of starting capital … but, it won’t get you to your Number just sitting there 😉

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