How to Turn Hobby Into Successful, Profitable Venture

Q: About four years ago, I started making money on a hobby I have been hooked on since I was a kid--building model trains, track layouts and doing wiring. Can you tell me what I need to do to really make a living off this hobby?

--Val Escuadro, Los Angeles

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A: First off, I would encourage your choosing to do something you enjoy and something you are good at. The more industry knowledge an entrepreneur has, the better his chances of success. Over the years, you have probably developed a lot of knowledge about the model train industry and about the model train enthusiasts who will be your potential customers. Doing something you love will give you the interest level and drive you will need to succeed.

You will need to target a very narrow range of people who could use your services. I suggest you try to reach them through the groups they join, such as model train clubs; what they read, such as hobby magazines and parts catalogs; and specialists that they use, such as retail outlets and parts suppliers.

You may be able to purchase mailing lists from the trade magazines and do a direct-mail piece and/or buy a classified ad in whatever catalogs and hobby magazines are available. Look in the same publications and see whether there are Internet chat rooms and Web pages aimed at model train enthusiasts. Those places will give you additional places to find clients.

Attend shows that are aimed specifically at model train hobbyists. Don’t bother with toy shows that will be too general to do you much good, especially when you are starting out.

For the first few shows, simply walk the aisles with your business cards and make contacts with the retailers who have booths at the shows. Buying a booth yourself is probably going to be too large an initial investment for you when you are just starting out. I imagine that most of your first customers will come from referrals from retailers who sell train track and layouts but do not have the time to do custom work for their clients.

You will need to decide what geographic area your customers will come from and whether you will go to them to do your work or whether they will send their parts and track to you. If you can work on pieces that are shipped to you, you can target a much wider audience, but make sure you include return postage, insurance and handling charges in your fees for jobs that come from farther away, or you’ll end up losing money on those transactions.

I advise you to keep your day job until you are truly satisfied that your income is consistent. This type of work may prove to be seasonal, and your income may look good for a month or two but then drop off at other times of the year--another reason to make sure you target serious train lovers, who will provide you with work year-round.

--Michael Ames, director

Small Business Institute

Cal State Fullerton

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Q: My wife and I have a new product we invented that will become patent-pending shortly. We need help finding a loan or investor to get started. What are our options for getting the best deal on a loan?

--Bill and Jeanette Marble

Temecula

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A: I always advise inventors to use other people’s money, rather than their own, to develop and market their products. Don’t max out your credit cards, take loans on your home mortgage, put your car or jewelry in hock or otherwise risk your own survival on your invention.

If the idea is developed correctly and it is valid, it will attract money. And there are sources of funding available out there.

Two basic places provide loans for inventors and new-product developers: private funders and commercial sources such as banks and other lending institutions. If you own intellectual property--such as a copyright, trademark, patent or trade secret--and have a prototype or model that shows what you have created is a functional entity, it can be used as collateral on a loan.

However, if you are independent inventors unaffiliated with an established company, it is very unlikely you will get a commercial institution to lend to you purely on the strength of your patent and prototype. Business banks normally give loans to enterprises based on either purchase orders or contracts, because they need reassurance that what they’re giving you upfront will be paid off with interest within a certain time frame.

Inventors are more likely to get private individuals to loan them money, provided they have a marketable idea and are willing to grant incentives to the lender. Private-sector funders are looking for several things:

They want independent market research showing the product is going to sell; a manufacturing feasibility study showing the cost, time frame and other particulars about manufacturing; a prototype, model or computer rendering of the product; and, most important, proof that intellectual property protection has been applied for, is pending or has been granted in the United States or another country.

Once you put all that together in a prospectus and/or business plan, send it out to seek funding. Make sure that anyone who looks at it signs a confidentiality/nondisclosure agreement preventing them from stealing your idea.

What incentives can you give someone to persuade them to make a high-risk investment in your company? You may offer them a piece of the action, long-term profit, an equity position in your company, high-interest repayments or any combination of the above.

You will also need to determine the repayment schedule and whether you will need further loans and capital as you move through the project.

Too often inventors have great creativity but are poor business people who do not know how to request, manage or utilize the funds they receive. You should get someone with business experience and financial know-how to assist you so you can protect your interests as well as those of the lender.

As far as finding funding, here are some resources that should help:

A Denver-based company, DataMerge, publishes how-to software related to business financing. Its Financing Sources Databank lists 10,000 alternative lenders for small-business people, including micro-lenders, commercial finance and factoring firms, small-business investment companies, venture capitalists and investment banking firms.

The entrepreneurial version of the software costs $189 and focuses on small-business lenders. You can request information about its package and obtain a financing newsletter by calling (800) 580-1188, or check out its Web site at https://www.datamerge.com

The Orange County Venture Network publishes a helpful list of local capital sources and service providers called the Southern California Funding Directory. Call (714) 855-0652 for information on ordering the directory, which costs $34.95 and will be updated for 1998 in December.

Finally, Bruce Blechman has written a book, “Guerrilla Financing: Alternative Techniques to Finance Any Small Business,” that is also a very good resource.

--Alan Arthur Tratner

President, Inventor’s Workshop

Santa Barbara

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If you have a question about how to start or operate a small business, please mail it to Karen E. Klein in care of the Business Section, Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016, or e-mail it to kklein6349@aol.com. Include your name, address and telephone number. The column is designed to answer questions of general interest. It should not be construed as legal advice.