A cosmetics company's creative cash flow

Without credit, I had to come up with a fresh approach to funding my cosmetics startup.

By David Chant, FSB Magazine

(FSB Magazine) -- I spent 12 years in the cosmetics industry in the U.S., where I grew up, and Europe before starting my company, Mascara Plus. It's a subcontractor based in Milan, and we sell to makeup companies, mostly in Europe.

Other subcontractors do all kinds of color cosmetics, but we produce only mascara. Large firms come to me and ask for a specific formulation - a mascara that lengthens lashes or adds volume or is waterproof. We put together some samples, and if they like what we've come up with, they place an order. We can handle big contracts - 200-liter batches of mascara, enough to fill 20,000 units - but when I launched the company in 2002, I had to do everything on a shoestring.

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This is a capital-intensive business - it's hard to start from zero. Back then I had no factory and very little money (also no clients and no employees), so banks weren't likely to give me a loan. Instead I found an Italian who had a shampoo factory with a lab attached to it. I could use his equipment, but our products were different enough that I didn't have to worry about his stealing my formulas.

We hashed out a deal in which I could work in his labs to develop samples, and if I signed any I clients, I would have to use his facilities to manufacture the product. It was a good setup - I paid no money upfront, and it gave me access to a factory that I could show to clients.

The plant was outside Turin, and it came with one other advantage: an apartment on the top floor that I could rent for about $400 a month. If you picture a fancy Italian apartment, this was not like that. It was a dump - supermarket lighting, old carpets, a mattress on the floor. But I knew that if I was still living in Milan I'd be going out a lot, spending money.

For the first year I had brochures and not much else. But finally I landed a big contract, about $110,000. A French cosmetics company was stuck: It had bought 200,000 mascara bottles and applicators stamped MADE IN ITALY. Its original supplier couldn't get the formulation right. The mascara was too thin and wouldn't apply enough volume to the lashes.

They sent me a bottle and asked me to figure something out. I knew a trick that would add volume and still work with the applicators they had - basically, a different combination of polymers. Then they asked me for about 2,000 liters of that mix - and I had to fill the bottles on my end, something I'd never done on that scale before. I said, "Sure," and ordered the supplies (like waxes and polymers).

The bill was more than $60,000, due in 30 days, and I had no idea how I'd cover it. There was no way the contract was going to pay off by then, but there was also no way I could turn that contract down.

That night I went out to celebrate with a friend, a British expat living in Milan. I told him about the contract, and he offered to back me with a loan - almost $40,000 at 6 percent interest, which I could pay back whenever I wanted. He wired me the money, and I was in business.

I learned a few lessons on that first contract - we never talked about shipping costs, so the $1,500 it cost me to get ten pallets of mascara to Paris ate into my profit margin - but the deal let me move into a better apartment (and pay my British friend back).

I now have six employees, my own factory, and clients in 12 countries, including two in the U.S. Sales in 2006 will be about $850,000. For my next move, I'm thinking of expanding to Asia. But this time I won't have to sleep in the factory.

Are you an entrepreneur who has found an innovative way to manage the work you do every day and to keep your schedule under control? Have you created an unusual, interesting workspace that helps you succeed? Please e-mail us your stories: The best will be featured in 2 new Fortune Small Business columns called HOW I WORK and WHERE I WORK. We are particularly interested in fast-growth companies.

Owner's Manual is written by entrepreneurs about lessons they have learned. Chant's e-mail is davidchant@mascaraplus.com. Please send feedback or ideas to fsb_mail@timeinc.com.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.