Paul Williams started a $4 million company that offers information-security consulting to government agencies and corporations. With clients like those, you might think a business would need impressive offices, administrative assist-ants and splashy marketing materials. But Williams, 45, launched his 4-year-old Houston firm, Gray Hat Research, for about $4,000.
Instead of hiring a lawyer who would charge $25,000 or more to incorporate the business, Williams went to mycorporation.com and paid $1,050. He held a contest to create the company name and logo. A friend with high-speed internet hosted the company website and e-mail for free.
Williams spent $25 for business cards and $600 on some inexpensive furniture. Finally, to keep overhead low, he made the company virtual, though he plans on getting office space soon.
As Gray Hat's success illustrates, you don't have to spend big money to build a thriving business.
In fact, a 2006 Wells Fargo/Gallup study found that on average, entrepreneurs spend just $10,000 getting their doors open.
Below, our experts offer tips on cost-cutting for every phase of the startup process.
Before You Start
Choose a business idea you're enthusiastic about, says Charles Stowe, a Sam Houston State University professor and the author of How to Start Your Business With No Investors and No Debt. "When people have a real passion for something, they don't expend resources on nonessential fluff," he says. "A person with a passion for art is going to buy a canvas and a paint set, not fancy office furniture."
To find the cheapest way to launch your startup, first locate a mentor. Business Startups Done Dirt Cheap author Bruce Thornton, who retired at 48, advises locating a "HOG--a helpful old guy" who's operated your kind of business before and knows which corners can be cut.
Richard Sloan, co-founder of web portal StartupNation, recommends finding the owner of a business similar to yours that's operating in another market-- that way you won't be a direct competitor. "Many times, entrepreneurs are willing to share their success," Sloan says.
Once you and your mentor have laid out a low-cost plan for launching your business, consider starting it on a part-time basis, says Sloan. Thanks to the internet, it's never been easier. An added bonus of the internet: "If you want to experiment with the marketability of something, go on eBay Marketplace [Research] and see if people like your price points," he says. "It will help you avoid mistakes."
And You're Off
To get started, you'll have a range of initial costs, from registering with your state to buying products or equipment. Watch every dime here, says Thornton. "There's only one fatal error in a startup: running out of cash," he says.
In 2006, when Elizabeth Wewerka, 32, opened consignment and new clothing and accessories store Lady Moxie in Madison, Wisconsin, she went on a search for inexpensive apparel-store fixtures. She found them at closing units of the chain Casual Corner. Furnishing her store for roughly $10,000, We-werka spent a cool $20,000 in total opening costs.
Once you've got the doors open, there are four categories of costs you can try to save money on, says Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University. They are: overhead, employees, marketing and operating costs. In each of these categories, there are myriad ways to save money. But two techniques are extremely powerful: Either find a way to avoid paying for things altogether or turn high, fixed costs into lower, variable costs.
Overhead is the monthly costs your business will incur whether it earns money or not, from insurance premiums to the electricity bill. To give your business the greatest amount of time possible to reach profitability, keep your overhead as low as you can, advises Marilyn Sweet, author of A Fearless Guide to Starting a Profitable $5K Business. When Sweet started Boulder Mortgage Co. back in 2001, she got a membership for a part-time office space that caters to startups. Sweet pays a monthly fee of $75 for the membership, then pays $11 an hour when she needs the office for meetings. She does most of her paperwork at home.
With her part-time rental, Sweet says, "I have a receptionist, people can drop stuff off, and I have a locked mailbox they can put papers in. That's all people care about." There's an even cheaper way to rent office space: Go back to school. Entrepreneurship centers at colleges around the country offer students free work space for their startups, as well as mentoring, bookkeeping help, internet and phone use, and more, says Cornwall. Even if you're not in school, you can save with a little elbow grease. "Do your own secretarial work and your own marketing work," he says. "[And] answer your own phone."
Unless you're a solo consultant, employees may well be one of your big-gest costs. But there are lots of crea-tive ways to avoid hiring full-time employees.
Wewerka usually operates her store by herself, but she sometimes wants time off for charity work. So she has trained several contract workers whom she pays to come in only when they are needed.
Many entrepreneurs form networks with colleagues who have complementary skills. Then they collaborate with other entrepreneurs instead of hiring workers, says Teresa Nelson, entrepreneurship chair at Simmons College's School of Management.
If you need sales help, you can go two routes, says Michael Song, a professor at the Institute for Entrepreneurship and Innovation at the University of Missouri, Kansas City. Either offer workers equity shares of the business but little pay, or completely contract out the work and pay commissions only on goods sold.
It's easy to blow your budget on TV ads or a costly media kit. But it's not necessary, says marketing consultant John Kuraoka, who offers low-cost marketing tips on his website, tightwadmarketing.com.
Here are a few of his favorite ways to market a new business without busting its budget: Do a spy report. Save on waste by searching local publications for competitors' advertisements. Create a competitive marketing audit that maps where others are advertising and what their ads say. Use these to determine what market niches might be going unfilled.
Search back issues of publications at the library. If ads persist over time, advertising in these magazine is likely an effective way to reach customers.
Sign up for competitors' mailing lists to see what specials they run. Check archive.org to see what their websites used to look like. If they dropped a promotion, it probably didn't work well. Look for holes in their current marketing to find angles that could get you noticed.
Have a brochure. Sometimes a basic, threefold brochure made with an inexpensive color printer can make all the difference in impressing pros-pects. "My neighbor hired a gardener because they were the only ones that had a brochure," Kuraoka says. "That made them seem more professional to her."
Pay for referrals. Car dealers often offer $100 to customers who refer buyers to their dealership. Think of incentives you could offer to those who bring you more business. Then stamp the offer on the back of all your business cards.
Build customer loyalty. For companies that thrive on repeat business, such as coffee shops or bookstores, reward those who come back again and again with a free latte or other item for every 10 or 12 purchases. "It's amazing how few businesses do that," says Kuraoka, "and it's very efficient because you're marketing to people who already use and like you."
Be an expert. Turn to the cable networks or small, local newspapers to market your expertise. Small cable channels need content, and small papers love homegrown columnists--and both reach potential customers.
Hold contests and giveaways. Land coverage in the local news with crea-tive contests or giveaway offers.
Operating costs include everything you need to keep the business going, such as equipment and merchandise. In the case of Better World Books, three Notre Dame students searching for a low-cost business idea in 2002 came up with a model where inventory would be practically free.
Xavier Helgesen, 29, Christopher "Kreece" Fuchs, 28, and Jeff Kurtzman, 28, saw that used textbooks didn't sell well through traditional online bookstores and that college bookstores didn't always want them back. So they obtain obsolete textbooks from colleges to market and resell them around the globe through their website, betterworldbooks.com, then donate part of the revenue to literacy programs.
The idea caught on, and last year, Better World sold nearly 2 million books and brought in $16.8 million in sales. The Mishawaka, Indiana, company employs 150. To save money, the trio hired programmers in Russia at $10 an hour to work on the software that manages their book inventory. Helgesen says that for their first deliveries, he rented a Ryder truck instead of buying one.
Once you get a business started, it's important to move as fast as possible toward the day when the business is self-supporting, says Thornton. "Realize that just sitting there breathing, you have a certain burn rate, and you are burning up your cash," he says. "You need to stay very small in the early stages."
Seattle writer Carol Tice reports on business and finance for The Seattle Times, Seattle Magazine and other leading publications.
Low-Cost Business Ideas
Sure, you want to start a business in a field you love. But can you find a business idea that's exciting and inexpensive? Absolutely, says James Stephenson, author of Entrepreneur's Ultimate Startup Directory, which lists 1,500 business ideas. Among his favorite low-cost startup ideas:
- Pet-related services: Most pet businesses have no inventory. Whether it's pet-sitting, dog walking, doggie day care or mobile pet washing, it doesn't take much to get started.
- Reselling: Stephenson knows one entrepreneur who buys old rock 'n' roll T-shirts for $1 at flea markets, then resells them online for $100 to nostalgic baby boomers.
- Packing service: Contact moving companies and learn which ones need crews to come pack up for customers, and you're in business.
- Freelance sales consultant: Contact any business whose product you like and ask to sign on as a rep, working on commission. If you have a car, a cell phone and basic sales skills, you're set.
- Errand service: Find busy executives and do all the things they don't have time for: Pick up their dry cleaning, do their grocery shopping, take their car in--you name it.