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Maybe We Don’t Need So Much Credit

A friend of ours has started a "new economy" business; she makes delicious Vermont brownies and sells them online at vermontbrowniecompany.com.

Lots of brownies made with good Vermont ingredients are rolling out of South Hero to the brownie-starved world. The bad economy doesn't seem to have hurt demand. Equally important, the poor credit environment isn't likely to stifle Vermont Brownie Company's growth. There's an important lesson here for entrepreneurs and for those who shouldn't be trying to rebuild the twentieth century's banking system.

When you order from Vermont Brownie Company (or Amazon.com, for that matter), you give your credit card. New economy companies DO depend on the fact that people have credit or debit cards. When the founders of Vermont Brownie Company go their company kitchen to make brownies, they're not guessing what the demand is and building an inventory that has to be financed. They already know how many orders they've got and for what varieties; they know what fresh ingredients they need (so can buy fresh); they know how much to bake of each (so can ship fresh); and they don't need to finance their receivables: you already paid.

Sure, someday they'll invest in a bigger kitchen and/or shipping facility. They won't have to buy a bigger server for orders, though; they use Yahoo's shopping cart. And they won't have to worry about financing huge inventories of product that may go out of style or be stale. If they decide to pay per click to advertise, they'll know quickly whether their ad cost is higher than the net return – and cash from orders'll pay for the ads. Won't need bank debt for that, either.

The need for capital hasn't disappeared from the economy, of course all us capitalists know that; but a surprising percentage of new companies can start on a small amount of invested equity and lots of hard work and can grow on cash flow generated from operations. Information flow and just-in-time manufacturing can reduce the need for financing directly. Information-based products like software and search, of course, have low cash needs so that's why companies like Microsoft and Google flourish atop mountains of cash rather than flounder in seas of debt. But even very tangible - and tasty – products like brownies can use a virtual store and preordering to reduce if not eliminate the need for debt to fund growth.

Debt financing and outside equity are going to be hard to get for a while. If you're starting a new business, it's worth seeing if you can build a plan whose growth is cash-flow funded.


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Well, so being totally linear here I decided to miss the point of Tom's posting and just
order the brownies. Real fine product, even the calorie adverse home crowd enjoyed
them immensely. They will make some nice holiday gifts for my wife's customers. Tom,
you're evil plugging this fine product on a technology blog, but we liked it anyways ;-) Tnx

John Hall

If you are growing fast, you are going to need debt. But you will have a hard time knowing if you are making a profit during fast growth... maybe better to forgo debt and grow slower.

Bob K

Dave, do not underestimate the power of knowing your business intimately and saving your profits for later.

dave mcclure

um, just because your customers pay in real-time doesn't mean that expanding businesses don't need to finance cash-flow needs. if your business is growing, you may need to spend on other business infrastructure IN ADVANCE of getting new customers, in order to meet demand. while growth may be an option, access to credit doesn't necessarily mean it's being mis-spent.

slower growth due to lack of credit doesn't help the fact that unemployment is rising. small businesses are probably the MOST important consumers of credit, since they create the majority of new jobs. if the credit-crunch affects small biz & forces more limited sources of cashflow financing, it will have a negative impact on the growth of job creation.

maybe we don't need so much credit? yeah, well it's likely access to easy credit in the housing & financial markets created a big problem. however, small businesses weren't the perpetrators. they are simply being caught up in the pullback on credit overall.

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