Small Business Financing – Start Up Financing

-Hi, I’m John Addessi, I’m a Business Advisor
with the Kansas Small Business Development Center at Johnson County Community College. You’re a startup when you have less than 24
months in business and so even if you’ve been going at it for a year or so, when you go
to a bank, they’re going to look at you as a startup business. So, the thing to understand right now is that
banks are not rolling the dice on a startup, generally, okay? And so what we see a lot of times is people
are looking for alternative funding and the one that’s been around for forever is called
Friends and Family, or actually, in our industry, we usually say three F’s because it’s friends,
it’s family, it’s any fool that will part with the cash and we see that frequently but
that’s the way it has always been done. The idea of people going to a bank for a startup
was really something that happened mainly in the 80’s and 90’s. Until now, it was save your money, borrow
it from friends, borrow it from your family and get it going. There are some other banks out there that
can handle smaller loans, maybe $20,000, $25,000 and they’re okay with a startup sort of thing,
you don’t have to have a whole lot of cash to leverage that, maybe $2,000 or $3,000,
you can leverage $25,000 but, you know, if you ever get a big project where you need
$300,000, you’re not going to get it from a bank for something that’s untested. So, it really would be a startup, again, in
that under 24 months window. If you’re looking for any kind of funding
for a project, you’re probably looking to borrow it from Friends and Family. An established business, the only way I could
see that really working would be if the business wasn’t cash flowing. If there was no profit, a bank’s going to
look at your books, they’re not going to like what they see and they’re not going to go
for it so even if you’re an established business, if things hadn’t been going really well, then
you might have to turn to Friends and Family, as well. And sometimes it just takes a really long
time for a business to cash flow, I mean, we see things where it’s gone two years, three
years before they hit break even, before it starts to cash flow and then make a profit
and so sometimes you just need a little bit more injection of cash to get over that hump. You know, if you’re going to go for a bank
loan they’re going to require tax records, they’re going to require a business plan,
they’re going to require financial projections, they’re going to require some paperwork and
I really think you should take it that seriously. I have seen parents do that with their kids,
they haven’t just written a check for $20,000 or $50,000 or so. I have a client who owns a clothing store,
she borrowed money from a bank, one of those programs I was talking about. She had about $30,000 saved, which was great,
but she needed a little bit more cash and she went to her dad. Her dad held her feet to the fire on the financial
projections more than any bank I’ve ever seen. It was his money, it was hard for him to save
that $30,000, he wasn’t just gonna throw it away, he wanted to make sure that the deal
was going to go so he had questions about how fast she was gonna grow until break even,
he had questions about her margins, he certainly had questions about her sales forecast. So, I would say be as prepared as if you were
going for a traditional bank loan. Friends and Family, it can certainly be a
lot faster. If you’re talking about a commercial loan
for a business, you’re looking on the order of probably four to six weeks to get that
thing approved, and it’s different. I mean if anyone has ever bought a car, financed
a car, you go into the finance person’s office, you’re out of there in probably an hour later
and you might have signed for a $50,000 car. A $50,000 business loan is going to be measured
in weeks, okay? So it certainly, it can be a lot faster than
that and it’s not going to require the absolute paperwork, I mean, like I said, a business
plan, great idea. Your parents, most of them, generally won’t
require it, there are reasons why you would want one anyway. Financial projections would be a really good
thing for any business owner to do to understand what their startup budget’s supposed to be,
what their monthly costs are, what their break-even point is, how long it’s gonna be until they
break even, how much working capital they need. So, those things are not technically required
so I guess we can consider it a little bit more low documentation. I can think of two. The first one is that you are putting a cherished
relationship at risk here, I mean, you see statistics where 80% of businesses don’t survive
over five years. If someone has invested their savings with
you and that added stress on the relationship is there, that can be pretty tough, I mean,
you’ve lost someone’s $20,000, $30,000, $50,000, this is not going to be a pleasant time around
the Thanksgiving table this year so that’s, again, the reason why we should really be
taking it seriously, this is not found money, this is someone that loves you, someone that
trusts you, someone that likes you and you really are putting that at risk. The other thing would be that borrowing money
this way from friends and family, there’s no credit built for the business. You know, if you’re working with an Altera
bank or a US bank or one of the ones that works well with small businesses and they
see you be a good steward of your money, they see that you’re not overrunning your checking
account for the business, they see that you’re not there all the time, every 30 days for
a bump up of your line of credit or for a bigger loan, they see that you handle the
cash well. When you do get to the point where you can
bring the bank in, the full commercial bank, and maybe it’s taking a small home-based business
and taking it much bigger and now we need $250,000 so we’ve got to go to a bank, they’ve
seen how you handle things, you know, you’ve got a track record with them. At the very minimum, they’ve seen the deposit
record so they’ve seen the cash come in over the years. So, and with it not being a traditional bank
loan, you’re not getting that exposure to the bank. The biggest one would just be to do the math
and if you’re not comfortable with that, find someone that can, I mean, that’s what we do
over and over again. My business card, instead of Consultant or
Business Advisor should say Math Instructor. We do that every day and you would be amazed,
we had a guy just recently, he was working in the industry, great, he wanted to open
up a small boutique in his industry. He submitted a business plan and it looked
pretty good. The only thing he didn’t include on the business
plan for his expenses were his own salary, okay? And this guy had a family, he had a mortgage,
he had kids and he needed to bring in $5,000 and that’s after taxes so that’s $60,000 a
year, after taxes, which means before taxes, he better make about $100,000 and that doesn’t
mean $100,000 in sales. His margin was 23 cents on the dollar, 23%
margin, kind of slim, okay? So, when you do the math, this guy has to
bring in over $400,000 in sales just to pay his own salary and he hadn’t accounted for
that and actually with the small size of the boutique shop that he was talking about, it
wouldn’t have even made the projected sales that he was thinking. Now to be told that, “Oh my gosh, man,” you
know, “you said maybe $385,000 and I’m telling you you’ve got to do another $415,000 on top
of that.” $8,000 out of this little shop that maybe
could do a quarter of a million dollars in a year, based on its size. So, you’ve got to do the math. Again, you’re putting a really cherished relationship
at risk here, so run the numbers on this thing.

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