BUSINESS FORUM: When and how should I borrow to increase capital?

Q: I was brought up with the caution to never borrow. I am the sole proprietor of a small business in need of additional capital. Any advice?

A: To never borrow is usually the right thing to do, but companies do borrow; even established companies with substantial assets have lines of credit. A refinement to that mantra in business is to "never use short-term debt to finance long-term needs" and "only borrow the amount you can afford to write off." Borrowing is a good thing if you can generate more profit with the loan than what it costs you. I recall a case study at Harvard Business School describing a short-haul railroad company issuing municipal bonds to buy additional railroad lines. In this case, the more they borrow, the more profit they make. Most companies would have a credit line to take care of fluctuations in inventory and to finance their accounts receivable. So you can do likewise to service your short-term needs by looking at this tactic as paying a service charge for the convenience of putting your own assets to work elsewhere.

That said, don't do it if you are borrowing to finance long-term growth because you may have a hard time serving the debt if there is a downturn in your business. Remember, the bank would want your personal guarantee, which means you are really paying high interest to use your own assets.

Q: Do you think it is possible to make a living as an optomechanical design consultant?

A: I believe it is possible for you to have a thriving consulting business if you are as good as you think you are and if you also have an entrepreneurial streak. There is definitely a need for this expertise in our industry. But you must do some serious homework to sample customers you can reach before you really know for sure whether consulting will pay off.

Capable mechanical engineers who can design clever mechanisms are rare because mechanical design is overlooked in university mechanical engineering training. Most of the design engineers are "home brewed" and, of these, only a subset is capable of designing optomechanical instruments because the precision required in an optical system is outside of the needs of most applications.

As you know, it is not difficult for most of us to cobble up something that works to a fashion mechanically, but optomechanical systems are quite different. These systems often require interferometric resolution in alignment and must be impervious to environmental changes. For instance, the simple adjustment screw-set wind-up presented one of the biggest challenges to New Focus engineers. Every designer would use fine tread to achieve high resolution and they also knew to apply lubrication to make adjustments smooth. But lubricant would ooze as the temperature changed , throwing the system out of alignment. I recall it took more than a year with intense effort to reach a point of precision and be able to apply a monolayer of lubricant, achieving smooth adjustment without drift.

On the business side, do not overlook publicity, even though most of us feel uncomfortable to tout our own ability. It would take a sizable client list to maintain income because needs are sporadic, people may be unaware of your ability or availability, and it is not easy to convince people to engage your services. Build a web site and print a brochure to describe your work and make yourself visible in the optics community. Viral marketing or getting people to sing your praises is probably the most effective way to get work in a service business. But it will take time for word to get around. To end in a positive note, this could work out very well for you, and certainly you can choose to work only when you feel like it.

Click to EnlargeMILTON CHANG is founder and managing director of Incubic Management LLC. He is also director of Precision Photonics and mBio. Chang is a Fellow of IEEE, OSA, and LIA. He has received Distinguished Alumni awards from the University of Illinois and Caltech, is a trustee of Caltech, and is member of the Committee of 100. Contact Chang at miltonchang@incubic.com with questions, and visit www.incubic.com for other articles he has written regarding entrepreneurship.

 

 

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