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Success by the Book
By Mary Claire Allvine

Smart planning and financing can bring a woman's entrepreneurial spirit to life.

MAIA HAAG HAD A $20 MILLION budget as a General Mills product manager and was rising quickly in her career. But as the daughter of two entrepreneurs, she couldn't shake the dream of starting her own company.

So during maternity leave, in 1998, she found time to research business opportunities. The best idea came in the mail: a personalized book with her newborn son's name in it. Clever, she thought, but couldn't the book be more customized? Of higher quality? She had her idea and resigned from General Mills.

As soon as her son, Austin, went to daycare, Haag went to work on her business plan, modeling how she could make and market children's books profitably. After three months, in order to meet family financial commitments, she took a job with an Internet startup as head of marketing. After work, once Austin was asleep, she would focus on her own business, typically from 9 p.m. until 1 a.m.

When the Internet startup failed, Haag joined another fledgling company – still working to create her own business after hours. She scouted out suppliers and ways to market a new product at the lowest possible cost. When a small inheritance passed to Haag from her grandmother, she decided it was time to establish her own business – one of 10.6 million companies in America with female majority ownership, according to the Center for Women's Business Research. Still keeping her day job, Haag started I See Me! Inc., which makes and distributes personalized children's books titled My Very Own Name. The books colorfully illustrate a story where animals bring letters one by one to spell out the child's first and last names in rhyme.

Last year, Haag's sales hit $2 million, and this year she's projecting $3 million while producing 7,000 books a month. But a great idea alone didn't get her here.

Financing the Dream
Haag needed cash, mostly to cover the costs of illustration, paper and binding. Her first year's budget was $90,000. That cost wiped out her inheritance plus some savings. The next year, she turned to her husband's graphic design business; his company lent hers $40,000 cash to keep going. But sales grew, and she needed more cash to stay ahead of orders. She opened a small business line of credit for a maximum of $50,000 – personally guaranteed. When that line proved insufficient, she tapped her home's equity for an additional line of credit.

I See Me! ate up those lines of credit almost immediately. Haag paid down both lines before the next holiday season, but she needed more cash the following year. As she added distribution locations like Nordstrom and the L.L. Bean catalog to her website (iseeme.com), she needed real money. She was stretching her payments to vendors, minimizing her own draw ($12,000 per year after two years in business) and keeping every cost, from public relations to manufacturing, payable on an as-needed basis. Finally, Haag met with her banker.

Haag's banker was impressed with her business plan, credentials and professional experience, as well as I See Me!'s track record. But I See Me! needed three consecutive years of profitable business to qualify for a conventional bank loan. Haag's banker suggested a seasonal line of credit backed by the U.S. Small Business Administration. As the owner of a profitable business, Haag was a perfect candidate for this type of debt, but she still needed to guarantee the loan personally. She took it and paid it off within a year. Not until 2004 did I See Me! become eligible for a true business loan, backed by the assets of the business itself. Haag uses that loan in advance of the holidays, her busiest production season.

Haag's successful use of debt sets a standard described by the SBA's "Five C's of Credit": character, capacity, capital, collateral and conditions. Sharon Hadary, executive director of the Center for Women's Business Research, notes that Haag's successful use of credit reflects the path followed by many profitable women-owned ventures. Hadary's 2005 study,Capital Sources: What Matters and What Works, finds that women entrepreneurs typically progress from using personal savings and personal credit to business lines of credit and business loans as their businesses grow.

Haag says she also did everything she could not to borrow at all. Keeping fixed costs low and linking most expenses directly to sales helped her grow without outpacing demand. "Five years into operating the business, my borrowing needs are more for cash flow management than for long-term leverage," she says. "I want to be as big and profitable as I can be – sales doubled every year when I started and are still growing at double digits, along with profits – but I refuse to outpace my own capacity. I don't borrow unless I've timed up the repayment.

 

$OURCE$ OF CA$H
From "Success by the Book"

SAVINGS
pros: easy access; low cost
cons: no outside check on your plans

CREDIT CARDS
pros: easy access
cons: potentially very costly because of high interest rates

HOME EQUITY
pros: easy access
cons: if business fails, your home is at risk

FRIENDS + FAMILY
pros: no official scrutiny; low cost; no applications
cons: if business fails, you jeopardize personal relationships and others' finances; you also have to spend significant time educating and asking

LOANS WITH PERSONAL ASSETS AS COLLATERAL
pros: accessible
cons: if business fails, you might need to sell other assets to pay back the debt; debt is limited to your available assets

SMALL BUSINESS LOANS
pros: require you to have a strong business plan; interest rates sometimes attractive
cons: small amounts; often require personal guarantee

SALE OF EQUITY
(BRINGING IN PARTNERS OR VENTURE CAPITALISTS)
pros: potential source of significant capital; no interest expense
cons: giving away the future profits to others; likely loss of some control over your company

WOMEN ENTREPRENEURS

»» Between 1997 and 2004, the estimated growth rate in the number of women-owned firms was nearly twice that of all firms (17% vs. 9%).

»» Employment at these firms expanded at twice the rate of all firms (24% vs. 12%).

»» 56% of women owners of firms with $1 million or more in revenue are likely to use commercial credit for capital; 71% of men are. Women and men are equally likely to use business earnings for capital.

SOURCE: CENTER FOR WOMEN'S BUSINESS RESEARCH (cfwbr.org)