I am just going to come out and say it: You need money to start your own product-based business. A lot of money.
I certainly do not want to squash anyone’s dreams or dissuade them from starting their own company, but if you want to start a product-based company, you need to have money to invest in your business.
If you think conservatively you might need $25,000 USD for your business, just go ahead and double it. Have $50,000 USD liquid for your project. It is worth repeating that it is imperative that you run the numbers so you do not jump into your venture without any semblance of the financial risks.
When we started our handbag company, charm and luck, we were fortunate that we had savings and retirement funds to pull out of. I have to preface this and say I can almost feel the financially conservative wanting to stop reading this blog post because they are probably thinking I was irresponsible. As an entrepreneur, I live with risk and almost thrive on it. We can have another discussion on whether me pulling my money out of a retirement fund was a wise move or not. Short answer: For my entrepreneurial spirit, yes, it was well worth the risk.
With a product-based business, there are so many variables that you have to take into account before you just jump in and start creating. These figures really need to be studied beforehand, so you can make sure you have enough capital to get your product out into the public before running out of money.
What Capital Is Needed Where?
Money for Setting-Up Company
- Money for the legalities of setting up a company.
- Money for business licenses, export/import licenses and any other special licenses. For instance, we imported exotic skins for handbags which needed a license per skin called a CITES (Convention on International Trade in Endangered Species). We also had to have a special license that was available from the US Fish & Wildlife Service.
- Money to put in the bank when you start your business account. It might also be a wise move to put a healthy amount into the bank account, so the bank can monitor your activity and possibly give you a line of credit after a period of time.
Money for Research and Development (R & D)
- If you are not savvy with computer rendering software, you may need to hire a designer to translate your designs into paper.
- If you are making a unique product, it will take rounds and rounds of corrections to finally have your perfect sample. Sometimes a sample maker will charge for each round of samples. Negotiate this process so you are not charged each and every time. I have seen some samples take at least ten iterations before it is even remotely close to the finished product.
- If you need to work with skilled artisans, make sure you pad this section with even more money, as you will be paying for their expertise.
- Mold fees. If you require a part or piece that the factory or sample maker does not have, you will have to pay for a custom mold fee. At least, once the mold is done, you own that and if you decide to part ways from your factory or sample maker, make sure you take the mold with you.
Money for Marketing
- Money for logo creation and website creation.
- Money for business cards and other marketing outreach-postcards, line sheets and brochures.
- Money for professional photos of your product. Please do not skimp on this. A fantastic versus a mediocre photo can be the difference between getting an appointment with a key buyer and not getting an appointment.
Money to Make Money
- Yes, you can send out solicitation emails and hit the phones hard to try and sell your product. But to have an even stronger impact, I urge my clients to do either trade shows or to travel and make one-on-one appointments with their dream retailers. I have always found that when I make the trip to meet with an important client, they pay much more attention to me because they know I have invested the time and the money to come to them. You will get their undivided attention versus trying to jockey with other companies at a trade show, or worse yet, them not returning your emails or phone calls.
- Money to invest in samples to send out to potential customers, for press outreach, showrooms or traveling salespeople.
Money for Production
- The most exciting part for me was receiving a new order. I would be very excited for about ten minutes and then go into the mode of – how do I produce this? Where would the money for production come from?
- Generally when you place an order with your factory, it cannot be for just 10 or 100 units. There are minimums which must be met with the factories, so even though the purchase order from the customer might only be for $10,000, it may cost you $20,000 because of factory requirements.
- Check out my last post entitled, What You Need To Know Before Manufacturing Your First Product, where I discuss where we made a critical mistake with one of our customers.
- Funds to hire a third-party inspection company or better yet, arrange to be present at the factory before your first order is shipped.
Money for Help
- Running a business takes so much time. In general, before a company gets traction, it is usually only the owner or owners doing all of the work. If the fax machine needs new toner – you have to change it. If there is a deposit to be made, you have to run to the bank. If you need to change a proposal for a client, you will need to block out a couple of hours to do it. The point is that it is only you. If you have interns, great. They can help with the grunt work, but you may want to consider hiring some experts if you have the budget for it. I strongly support hiring outside consultants for marketing-SEO and traditional marketing experts, a public relations firm to get your business noticed, and a business coach or mentor to help guide you.
Money for Year 2
- If Year 1 flies by and you have made a couple of sales, but you are not in the black yet, you will need to infuse your company with more working capital. It can take up to three years or more of you supporting your company, and it is critical that you have those funds liquid so your company is able to take root and prosper.
Creating a physical product requires an idea and an enormous amount of time, resources and commitment. It is incredibly rewarding to see a tangible product that was once a thought now created into a physical object. Just make sure that you run the numbers and are prepared for any hidden costs which will pop up.