Is there a cash crunch for startups?
February 28, 2008 by ShannonCherry
Filed under Business
The housing market problems seem to have finally caught up with entrepreneurs, according to a recent story from BusinessWeek.
And it seems that Small Business Administration (SBA) loans are getting scarce, too!
So many are turning to their own homes to get a second mortgage to front the costs of a startup. I’m just not sure putting up my home is a smart thing to do!
Do you have any advice to someone starting a business on how they can get some much needed cash?
There is indeed a cash crunch! It’s the biggest recurring topic on my blog! I have been turned down for several loans and don’t have many options left. I’d be interested to hear what others are doing in this dwindling economy.
I just read an article about a concept called Sou-Sou. This is where you and a few friends get together and pool your money for a length of time. At the end of that time one person in the group gets it. You then repeat the process until everyone in the group has had a chance at getting the money.
For example, say I and three of my friends each agree to put $50 in a pot each week for three weeks. At the end of the three weeks, that’s $600 that is given to one person in the group. We would then repeat the process for another three weeks and give the money to another person in the group and so on and so forth until everyone has had the opportunity to receive the $600.
I know it is a bit unorthodox but if you could find some good friends who would be willing to go in on a deal like this, then you could drum up some money that way. The best thing about it is that it is interest free cash. The bad thing is if someone renegs than that could cause other problems.
I’m not sure of your policy of links in comments but if you want I’ll be happy to send (or post) a link to the article.
Thanks for getting back to me Shannon :)
Here’s the link. The Art of Sou Sou
Sell.
I’m convinced that without preorers and sales, any idea is not working. So sell. Sell stuff you intend to make but isn’t ready. Sell stuff that’s almost done. Spend your time getting orders in the door, and then–and only then–get money.
A money first approah is a sure bet to failure, because money is a bandaid.
Thanks for the great article. Keep up the good work.
Hi Arwen, there is a similar practice followed in India called “chit funds”. Here, the participants of the fund contribute a fixed amount weekly, monthly (most popular) or yearly.
The duration of the fund is typically the same as the number of contributers. The names of participants are written in small bits of paper (called chits) and dropped in a box. End of month, chits are drawn to decide the recipient of the fund for that month. The chit drawn is removed so that the same person does not get to withdraw the fund in this cycle, only contributes to the kitty.
This continues until all members have received the kitty at least once. This is mostly practiced by housewives, rural households (who do not have access to bank funds) or relatives to raise capital for their business, marriages, or to construct houses.
Some chit funds have an auction to decide the fund recipient. Instead of drawing the recipient’s name, the participants get together end of the month to bid for the corpus. For example, 10 people contribute Rs 100 each to the fund. There is a minimum bid amount of Rs 50. The highest bidder bids for Rs 60. Therefore, he gets Rs 1000 – Rs 60 = Rs 940 from the corpus. The balance Rs 60 is divided either among the participants (in which case they need to contribute Rs 94 each for the next month) or goes as service charge to the fund manager. There is no auction in the last draw and the final corpus is given in full to that person (effectively a reward for waiting that long!).
However, chit funds started becoming a problem when fund managers disappeared with the cropus! Today, there are serveral rules and Reserve Bank laws governing the operation of these funds.
Hi Geeta,
That’s very cool. I imagine that every culture at one point had something similar but, due to dishonest people, had to regulate it or wipe it out completely. In this day and age though with high interest rates and hard to get credit, this would be a great option. You just have to find people you trust.