OPENING
YOUR OWN STORE may be a dream come true. for this dream may be an entirely
different story. How you structure the finances for your business will have
long term effects on your entire life. If it were as easy to get started as
digging through your couch to find the change you lost, everyone would be
opening stores! It isn’t! Unless you are wealthy enough to finance your new
store with no financial strain, raising the money you’ll need may prove to be
one of the toughest challenges you’ll ever face.
So,
a word of warning: whatever you do, make sure you leave Paying for this dream
may be an entirely different story. Yourself a few thousand dollars in the bank
to pay your living expenses as
you grow a business and cover emergencies. Do not
put every penny you own into this business. You need to get
a good night's sleep every night because each morning you need to awake
refreshed and ready to conquer the world of retailing.
Self
Funding
Let’s
assume that, by working overtime, perhaps at a couple of jobs, you’ve been able
to stash away a few bucks. If these are funds you’ve set aside for your
retirement or your kids’ education, don’t touch the money to fund the business.
Pulling these funds out may incur hefty penalties, and if you borrow against
them, you may have to start paying them back before your business can afford
it.
If
you have funds from money market accounts, stocks, bonds and other investments
that are not set aside for a specific purpose, they may be enough to get you
going. But again, think carefully so you can be sure you keep enough to live on
while you are building the business— even if it grows more slowly than you
hoped. Remember this: It’s always tough to raise money, but when you are
desperate for it, it’s almost impossible.
Insurance
policies may give you the opportunity to cash them out, or if there is cash
value accumulated with the policies, you may be able to borrow against them.
Make sure there is enough insurance coverage left before you make this
decision, because you do not want to leave your family vulnerable if something
were to happen to you. Take a close look at your assets and list the items you
own but really do not need. An auction (we Internet junkies love selling stuff
on www.ebay.com
and several other auction sites), a garage sale, or newspaper ads can turn
these items into much needed cash. Big ticket items like extra cars, boats,
vacation property, jewelry, art, furniture, and collectibles can raise
substantial working capital. With the big ticket items, make sure an appraiser
works with you to get the most money for these goods.
Assets
you take for granted could be turned into rental income to help with cash flow.
Parking spots, garages, basements, storage areas, or even a spare bedroom can
produce income to help you start your business or defray living expenses.
Credit
Cards
It
is very tempting to look at your personal credit cards as a source of money.
Don’t make this mistake. You need to keep your personal credit and business
credit separate no matter how tempting it is to use one for the other. However,
you may want to apply for a business credit card. Because they are easier to
get than bank loans, this may be helpful.
However,
two words of warning:
•
Make sure you study the interest rate and penalty clauses before you even think
of opening a business credit card account.
•
Your business credit card should be only a supplement to your financing. If the
card is the only way you have found to finance your business, walk away from
this dream—at least for a while.
Friends
and Family
Most
new businesses are financed by entrepreneurs themselves, or by one or more
members of their family. Most of us are lucky enough to have a rich parent,
sibling, uncle or cousins! And that’s fine, up to a point. After all, where
better to get funding than from people you already know and trust
and who already know and trust you?
The
point to keep in mind is that money has a funny way of souring relationships.
Tensions about how the investments made by these family and friends are being
used can have a serious effect on relationships. It is amazing how involved
relatives who have lent you money become in your business. If you are opening a
retail store to give yourself independence, think twice if you plan to finance
your store with money from your relatives and friends.
If
you do decide to involve relatives, make sure you keep the business side of the
relationship separate from the personal side. Sign legal agreements just as you
would with other investors. Don’t fall prey to the temptation to push these
formal arrangements onto the back burner “because it’s only good ’
If
you do, you just might find yourself meeting Uncle Mic in court. And, unless
one of your financing relatives
is truly an experienced entrepreneur in your industry whose opinion you value,
don’t invite your relatives onto your board of directors.
Nothing
is more uncomfortable than entrepreneurs having to justify their actions in
front of uninformed relatives.
Above
all, before you ask for even a penny from your family and friends, search deep
into your heart and ask yourself: “If I lose all their money, how much will I
hurt them?” If the answer is more than “a little,” find the money elsewhere.
There are other ways your loved ones can help you—let them prepare meals for
you and your staff, take care of your kids, or help out in your office.
If
you really do need to obtain funds from your family—and you are convinced they
can afford to lose their investment if things go wrong—try to structure the
deal as a loan rather than as equity. Rather than
making them part owners of the company, borrow the money and pay it back with
interest as soon as you can. That helps to keep relatives out of your hair.
Banks
Today’s
bankers, unlike the bankers of our parents’ generation, seldom have the
discretionary authority to grant loans based on their own gut feeling that you
are a good risk. Rather, they are only allowed to make a loan to you if it fits
the bank’s impersonal criteria.
A
bank is a retailer just like you. It sells money. Like any good retailer, the
bank relies on repeat, steady customers. They even run sales like retailers,
such as specials on car loans or a toaster when you open a new account. Like
retailers, banks need to make a profit to survive.
However,
with the major bank mergers of today, there is a drive to increase profit and
reduce risk. To this end, huge acquiring banks have replaced the personal
banking relationship with statistically based systems. Instead of trusting you,
the new type of bank manager relies on a microscopic dissection of your life
and business.
The
first thing he wants to see is your business plan. Assuming that passes muster—in
the bank’s opinion the plan is workable, protects the bank from losses, and is
likely to generate a comfortable profit—the next step is to review your
personal financial standing. The banks will almost never lend you money at the
start of a new business without either your personal guarantee (which means you
are putting up everything you own as collateral for your debt), or a specific
piece of collateral such as your house. One way or the other, the bank wants to
make sure you have enough money available to repay their loan even if the
business fails.
Banks
today are information collectors, not your friend. Their focus is on the facts
and formulas of their
business, not on the excitement and potential of yours. In
fact, your friendly bank manager doesn’t even have the authority to make a
loan. That is up to a bank committee—whose only interest
is in the strength of your collateral. Of course, banks will loan you money;
that’s how they make theirs. But, in addition to demanding a personal
guarantee, they will want you to make an investment. Banks are much more likely
to loan you 60% of what you need if you put up 40%. So if you need $100,000 to open
a store, the bank is likely to loan you $60,000 if you put up $40,000 and
personally guarantee the rest. Your local bank sees lots of entrepreneurs with
dreams. Most do not have a clue about business financing. Set yourself apart by
coming across as a capable professional. First, dress the part. Except perhaps
in Southern California, business casual does not apply to bankers. Second, make
sure your banker understands that your number one priority is your
business.
Come professionally prepared with your business plan, list of assets,
and financial projections.
Here
are some rules to follow when dealing with today’s banker.
1. Never
rely on what the banker tells you in person. Always get everything in writing.
If you are ever forced into court, oral agreements will be hard to prove, and,
in the absence of proof, they will be disregarded.
2. Don’t
sign anything without first carefully reading every document. Always have the
banker send you the documents you are to sign in advance so you do not get
caught up in the pressure of making decisions at the closing.
3. Jury
trial waivers, replacing jury trials with binding arbitration, are becoming
more common in business loans. Generally, they are desirable for you.
Arbitrators generally find a solution that splits the difference between
arguing parties. That is usually better than having to spend huge sums on legal
fees to fight a bank with deep pockets and to do so in front of a jury. Even if
you win, your legal costs will kill you.
4. Try
to avoid signing a liability release, a clause that is showing up more and more
in bank loan documents. A liability release says if you go out of business
after the loan is approved, the bank cannot be held responsible— even if the
reason you are broke is that the bank unfairly called
the
loan.
5. Your
banker’s allegiance is to the bank, even though you may have grown up with him
and you knew him as a friend. Banks are not in the business of lending you
money; they are in the business of collecting the bank’s money.
SBA
Loans
The
small business administration is a government agency that, if they like your
business prospects, will offer bank loans to small businesses. The basic 7(a)
loan guarantee is the SBA’s primary business loan program to help qualified
small businesses obtain financing that they could not get otherwise. Loan
maturity is up to 10 years for working capital and generally up to 25 years for
fixed assets. These loans are made through commercial lending institutions
(called “participants”) and are guaranteed by the government.
Not
all banks choose to participate, but most do, and some nonbank lenders will
also make loans. However, please note that the SBA will only guarantee a
portion of any loan so the lender and SBA share the risk if a borrower cannot
repay. Thus, chances are, you will still have to put up
some of your own collateral, just not as much. If the SBA loan is the avenue
you take, be prepared for a drawn out affair. Not only do you have to fill out
everything the bank needs to know about you, but now you must also fill out all
kinds of government forms and meet government investment criteria. I have never
met an entrepreneur who enjoyed this process! But through all the pain, you should
not forget that this great program has allowed entrepreneurs throughout the
country to live a dream that, without the SBA, they could never have financed.
For more information, go to www.sba.gov.
Angel
Investors
Angel
investors are often veteran entrepreneurs who once started, built, and sold
their own companies—often in a field akin to yours. Usually they provide the
seed money for the first round of business growth in exchange for a share of
your company. Most angels look for proof of your own investment in the company,
so do not expect an angel to put money in unless you do. Angels are not easy to
find; it’s usually a question of who you know and lots of networking. However,
if you can find one, you have the advantage that he or she knows about your
business and will be less impatient about setbacks that are not your fault than
will a banker who looks only at the numbers.
Venture
Capital
If
a bank says no, you might consider contacting a venture capital firm (VC). VCs
typically demand a very high percentage of equity for their investment. Ownership
at 70 to 80% is not uncommon. Moreover, VCs are a very tough bunch. They are
exposed to dozens of business plans and fund only a tiny percentage. They are
often frustrating for entrepreneurs because they require a huge return on their
investment, often as much as ten times in three to five years. On the other
hand, VCs can open doors that you would never be able to open on your own.
Their contacts with influential and wealthy individuals and companies can
provide you with customers you would never have known. And they can sometimes help
you grow faster than you could on your own.
Strategic
Investors
Finally,
and often very helpfully, there are strategic investors who will lend you money
or, occasionally, invest equity in your business because your success also
helps them in other ways. They will rarely give you all the money you need; but
they will often give you a major back-up.
Typical
strategic investors are suppliers who may invest by giving you inventory to
sell but allowing you six months or even a full year to pay. Obviously, this is
a way of providing you with cash flow—you collect the money from the inventory
you sell long before you have to pay the suppliers.
Similarly,
your landlord or the firm that supplies the fixtures for your store may waive
the payments in return for a share of the business. Slightly further removed,
advertising agents, insurance brokers, or
even temporary help agencies (if they expect that you will be hiring lots of
temps) may loan you money on the condition that you use their services.
Summary
The
way you finance the business has long-term effects on your wealth. Doing it all
yourself (unless you are rich enough to handle it) could leave you so strapped
for daily living expenses that you lose the joy of running your own business.
Giving too much of the company away could leave you bitter as you slave away to
support your investors. So, deciding on the right balance is a matter of the
art of the possible and your own gut feel. It’s a tough, exciting call. And
that is the reason you became an entrepreneur . . . right?
You
were born an achiever, remember that.
Africa's finest!
Brian Pade
