Business Plan Footnotes
Funding Your New Perfume
You need money. Where will you get it?
You can't make perfume without money.
In some instances you may be able to sell your perfume without money but, to make perfume, you will always need money.
The question is where will you get it?
Sources of funding for your new perfume
Put out of your mind the idea that someone will give you the money to make and market your perfume. It could happen but, more realistically, raising the money will be up to you and quite likely most or all of it will come from your own pocket.
Still, it is useful to consider all possible and perhaps impossible sources.
Banks make loans to companies and individuals who have both collateral and cash flow. If you want to borrow $100,000 to launch your new perfume, you will have to pledge adequate collateral plus demonstrate that you have a personal cash flow adequate to service the loan, that is, to make the regular, required payments of principal and interest.
If you are taking a loan as an individual, the collateral will be your investments, house, bonds, stocks.
If your business is seeking the loan, the bank will want to see business financial reports and tax returns that back up those reports. For collateral they might accept real estate, production machinery, delivery vehicles, and possibly inventory if it has a stable value. It is likely that they will also require you personal guarantee.
Some banks make loans based upon personal cash flow alone -- your income, from a job, from investments, from your business. These loans are generally in the form of credit cards. Your credit line will be based upon the bank's estimate of your ability to pay both the debt you incur and the interest on that debt. Unless you are a high income person, credit card limits tend to be relatively low while carrying a high rate of interest. You do hear the occasional story of someone who launched their business by maxing out all their credit cards for capital. I wouldn't put too much credence in these stories.
In general, banks will not be a source of the capital you need to launch a new perfume.
Venture capitalists do not provide money for new businesses. And, for the most part, they shun fashion businesses, a category which includes perfume.
A venture capitalist wants to see that you have a viable and scalable business model. "Viable" generally means that you have sales in the tens of millions. "Scalable" generally means that, with a capital injection, your business can achieve sales in the hundreds of millions or better yet, billions.
In your perfume business -- YOUR perfume business -- ask "where are the sales?" and "where is the profit?" Once you achieve these your possibilities for funding will increase but it is very unlikely that you will receive help from venture capitalists.
A stock offerings
If you have people who share your perfume vision and have money to invest, you can raise the money by forming a corporation and allocating shares by the size of the individual's investment and their role in the business.
If you take this path it is important that you raise enough money to fund your business until there is a very real chance that it will become profitable. Except for sales, any new money will come from either loans from an existing stockholder, which are likely to carry a considerable risk to that stockholder, or by recruiting new investors. New investors will dilute the value (if any) of stock held by the founders. If the company is really desperate for new money, a new investor, if one can be found, could end up in control of the company.
Stock offerings mean there will be multiple stakeholders, each with a right, depending on the shares they hold, to have a say in the business. If the business is YOUR baby, you may find this uncomfortable.
Except for tax issues and personal liability, a partnership with many partners presents much the same situation a corporation.
But a partner can be something quite different and, in the world of fashion which includes perfume, a single strong, supportive partner can be a viable option for launching a perfume business. Often a viable partner is one to which you are bound by an intimate love relationship. (Most business books won't mention this.)
A good number of fashion and creative type businesses have been launched by a partnership of spouses or lovers. It works when the partners' contributions are complimentary rather than competitive and where the love relationship is a strong and enduring one.
Usually one partner will be the visionary creative while the other is the solid business head. It also is important that together there be adequate financial resources to carry out the business plan without jeopardizing the love relationship.
Family and friends
Family and friends are a traditional source of start up capital but family and friends must be treated with with care.
The biggest issue is how you "sell" yourself and your project. A wealthy, financially sophisticated relative may give you money to pursue your dream, counting it lost as they write the check.
But a serious problem arises when you oversell your concept and chances of success to friends or relatives who are not financially sophisticated, who can ill afford to lose the money, and who fully expect -- and need -- you to pay them back. In your enthusiasm you become blind to the high risk involved with a new perfume and, should the venture go bust, your relative could be badly stressed.
Business development loans
Governments, at various levels, at various times, offer funding to stimulate business development at a very local level. Sometimes loans are judged on the benefit the business might have to the community rather than on strictly financial grounds.
Sometimes these agencies are well established. Sometimes they come and go with the rise and fall of political parties. Often the recipients of the loans are political insiders. Yet sometimes enterprising individuals manage to steer their applications through and receive funding they could not get elsewhere.
Look for these opportunities at your local level. Follow the business news in your local newspaper. Contact the business editor of your local newspaper. Track governmental websites. You might come across a funding opportunity.
To get more insight into how one of these agencies operates, visit the website of the Canadian Development Bank, a financial institution owned by the Canadian government that provides both funding and consulting services to entrepreneurs.
An angel investor is someone with money who takes an interest in what you are doing and is willing to provide funds to make it possible.
There are pros and cons to this type of financing and they are well described in the an article in Business of Fashion.
The issue, in short, is power. Who will have the say in guiding your venture forward? Once you take someone's money that someone is going to have a say in what you are doing. You need to ask yourself, very honestly, why anyone would want to give you money to start a perfume company? What do they want? The answer may not be money. You may find that what the "angel" wants won't work for you.
But, should an "angel" drop from the sky with an offer of money, you certainly would be foolish to dismiss the proposition out of hand.
On a personal note, a woman once told me that Al Capone had offered to fund her husband's fashion business but her husband let the offer pass.
Your Existing Business
Here we're finally in the realm of the practical, logical, and potentially profitable. If you have a business with customers who are likely to buy perfume from you, you can use money from the business to fund the creation of that perfume, just as you would use money from the business to fund inventory and other business needs. If your business has credit lines, these might help provide the necessary cash.
There are two great advantages of using money from your business. In the first place, the money is yours. In the second place, you have customers and it is assumed that you know a good deal about their tastes and purchasing habits. Thus you might have a ready market for your perfume and this is a of huge importance.
The "caution" is that your existing customers must be high quality prospects. And you don't want to risk withdrawing so much capital from your business that it puts your company's future at risk.
If none of the above financing sources work for you, you are left to provide the money yourself. How big a check can you write? Will it be enough? Do you have more money coming in?
Your own money will come from one or more of these resources: (1) your personal savings, but hopefully not your entire life savings, (2) your personal cash flow, salary, money from investments, pensions, alimony, or whatever, and (3) assets which can either be sold or used as collateral for a loan.
After you add up all your potential capital you should take a hard look at your business plan and its financial requirements before you start writing checks.
Other articles in this series:
#1 How To Write Your Most Important Business Plan Ever
#3 Developing A Hook Guaranteed To Sell Your Perfume, Part I
#4 Developing A Hook Guaranteed To Sell Your Perfume, Part II
For article updates, etc., add your name to Phil's mailing list.