July 7, 2008
10:02 am | 0 recommendations | Be the first to comment
Probably one of the most uncomfortable things a first time entrepreneur has to attempt is their first set of financial projections. Frequently I hear the following:
- “Well…I don’t know how many people will buy from me!”
- “I just took a WAG (wild ass guess).”
- “This is so stupid…why am I doing this!”
- “How the hell am I suppose to know?!?”
To all of them I answer “YOU are the expert in the business you are starting and You have to set some expectations for the banks and/or investors.”
As you may have heard, “Financial projections are part art and part science”.
So what does that mean? It means that you won’t know how to do them until you have done them. Sure there are some things you can estimate based on your knowledge and experience with a particular type of business, but the rest has to come from research. And, that research, is part of the overall business plan.
In other words, the “part art” is the educated guess or the assumptions you base your projections on, which inturn is based on your expectations.
Your expectations are based on the research you completed in the written section of your business plan, that is the “part science”.
Regarding the comments above, the last one: “How am I suppose to know?!?” is peticularaly troubling. As mentioned before, you are suppose to be the expert. But also, you should have done the research to set your expectations based on a reasonable set of (documented) assumptions.
Banks and investors will expect you to know your stuff upside down and backwards. If you bring in a boiler plate business plan with canned financial projections, or ones written primarily by another person with numbers that you can’t explain, you won’t be getting any money any time soon.
After all that I hear: “Well, all of that’s nice, but I still don’t know technically how to complete my financial projections.” So here is the process:
- Make sure you have a solid financial projection program to begin with. It can be a stand alone program or excel templates but make sure the three statements (Income Statement, Balance Sheets, and Cash Flows) are interconnected.
- A well researched and written business plan is a must. Every section of the business plan holds key data related to the financial statements.
- Build a Beginning Balance Sheet or Sources and Use of Funds. Your Operations Plan should have laid out the assets you need to purchase to get started (Building / Equipment / Furniture & Fixtures / Inventory). Get firm quotes from several sources on each. Then document your funding based on sound business banking criteria including proper equity injection. Finally, your balance sheet should balance i.e. sources of funds=uses of funds (otherwise they wouldn’t call it a balance sheet!).
- Build your sales / revenue projections. The data in the Market Potential section of your business plan or independent Marketing Plan will help you bracket your expectations for sales but in general, Sales projections are determined two ways:
- Driven from market data: Target market size is determined in units or dollar volume and you estimate the amount of that market you can capture…bracketed by competitive factors (number, advantages, price) and industry factors (growth, decline, obsolescence).
- Driven from budgets: When pursuing a broad market strategy it is better to determine break even point then estimate a sales goal to reach break even and eventually profitability.
- Build your expense projection. Again, the information you compiled in your operations plan and other parts of your business plan will help you determine appropriate business overhead expenses.
For example your location/building will determine your lease, utility, maintenance, insurance and property taxes. Your inventory section will help you determine cost of goods sold and cash flow terms such as accounts payable. The marketing section will help you budget your advertising and promotion expense. And, your personnel section will help you forecast your salaries and wages, payroll taxes and benefits.
There is no great mystery to building financial projections. And now that we have demystified the “art and science” of it, you have the tools you need to get started and confidently plan the launch of your new business idea.
On a final note, you don’t have to go it alone. There are business consultants located at Small Business Development Centers all across the country. These counselors are usually well versed in business planning and helping your produce solid financial projections for your business. So look them up and get started today!
Or if you just can’t seem to find the answer you are looking for, ask me! I am always happy to help an entrepreneur in need!
Donovan Wadholm
www.DIYBizPlan.com
June 6, 2008
10:44 am | 0 recommendations | Be the first to comment
I grow tired of hearing the opinion that business plans are not a necessary component of starting a business. In Mike Michalowicz’s blog post Business Plans are OUT! Here’s the New Way… he expounds on the virtues of the “Three Sheet Strategy” in lieu of a business plan.
In a nut shell the “Three Sheets” are:
- A Prosperity Pan - which is like a mission statement and vision statement wrapped into one.
- Quarterly Plan - A summary of what needs to be done in the next 90 days to work toward achieving your “prosperity plan”.
- Daily Goals - a typical dashboard approach to ongoing metrics.
While I agree that the “Three Sheet Strategy” can be a useful addition to a business plan for “strategic” purposes, it in no way can replace a business plan.
The picture painted by Mr. Michalowicz suggests that all business plans a) take too much time to research, b) lay out strategies that are never implemented and c) provide financial projections that are wildly optimistic.
While, the above scenario is true for some entrepreneurs who have a very broad based business model…it is not true for small businesses who pursue a focused business strategy.
A focus business strategy allows you to form reasonable expectations because you have a niche in a market place (product market or geographic market). For example it is easier to form research, plan and form reasonable projections for a restaurant or liquor store that serves a local market than for a software company serving the world.
Chasing a nationwide market, i.e. trying to become the next Google, necessitates broad demographic information. In other words, EVERYONE is your potential customer. And because everyone is your customer you are forced to come up with asinine assumptions about capturing X% of a certain market…which leads to wildly optimistic projections.
However, when planning for small business competing in a local or regional market, at the very least you need to create a short form business plan. Let me explain by describing why each section of the business plan is needed:
- Business Description (What your are doing) - The purpose of this section is the same as his “Prosperity Plan”. Setting the mission of the business, describing the products and services and explaining your competitive advantage.
- Market Opportunity (Who you are doing it for) - Granted completing market research takes time and the data is limited, but understanding your market space (target market size, trends, competition) will help you set reasonable expectations for your sales projections.
- Marketing Plan (How you will let them know) - Now that you have identified your target market you have to reach them using the most efficient methods.
- Operations Plan (How you will get it done) - The operations plan helps you form reasonable assumptions for startup costs and ongoing expenses. location, building, equipment, inventory and personnel all have related initial costs and ongoing expenses related to them.
- Management Plan (What expertise do you have) - While a team is needed for entrepreneurial firms, and it is suggested for small businesses, most startups are limited to their founders and maybe some family members.
For a small business with a focused strategy completing these sections may take some work but they are certainly doable. And, if done correctly, will result in solid financial projections that mirror the market’s true potential.
This is not to say they will be exact…business planning and projecting is not an exact science. The point is to determine if you business will be profitable within a reasonable range of sales. These projections will help you determine what will happen if sales are 80% of projection, 50% of projection or if expenses are 200% of projection (called a scenario analysis). In other words, it will help you determine the appropriate amount of working capital to have on hand day one to get through the “what if…” scenarios.
The honest truth is most people are scared of what they don’t understand. And, for most entrepreneurs, business planning (or planning in general) is not something that comes naturally to them. So they blow it off as not necessary, stupid or an exercise in futility.
Finally, it is uncommon for a bank or investor to fund a company, startup or otherwise, with out a solid business plan. If you brought in a “Three Sheet Strategy” to a bank or angel investor I guarantee they will ask for a complete business plan with at least a years worth of comprehensive financial projections.
Yes, you probably should have something similar to the “Three Sheet Strategy” for implementing your plan, and…No, business planning is not the “be all end all” of small business success. But, writing a business plan is nothing to be afraid of as long as you are armed with the tools and resources to help you get it done.
Yours will be a better business for it in the end.
Donovan Wadholm
www.diybizplan.com
May 5, 2008
08:47 pm | 0 recommendations | Be the first to comment
In Free Money to Pay Your Bills! Or Maybe Not Part 1 we discovered how Matthew Lesko (and others) use word play and semantics to get you to buy their books believing you will obtain riches on someone else’s dime. In Part II we will discuss what you really are buying when you purchase one of these grant guides.
A distinction needs to be made between grants, loans you don’t have to pay back, financial assistance payments, and government contracts all referred to by various grant guides as ”free money”. These words get thrown around a lot in Lesko (and others) commercials so much and sometimes so close together they seem interchangeable when in fact they are not.
Grants- There truly are grants available for small businesses. And, I believe in fact the people represented on Lesko’s commercials genuinely received grants for the business they started. But, the fact is these programs are far from prevalent in most communities. And when they are available they are: a) limited in geographic scope and industry classification b) limited in terms of who can qualify for them and c) limited in how the money can be used. Most of the grant sources are localized so if there is a grant for a person with a disability to start a widgit retailer in Podunk, Missouri they are not going to give you the money to start that shop anywhere else.
Here in North Dakota we have grants available for home based Child Care for safety equipment, Agricultural Product Marketing & Prototypes and New Technologies born out of rural companies. Also, in some communities local Job Development Authorities and Economic Development agencies offer grants to specific startup businesses.
I don’t mean to say that grants are not available. In fact, I helped one of my clients get $65,000 in grants to open a small manufacturing business in small town, ND…none of which he had to pay back. But this is the exception not the rule. Out of over 1000 clients I have counseled since 2003 only about 5 have received grants and of them only 1 was aimed at starting their business rather than expanding it.
Loans You Don’t Have to Pay Back - The best I can tell this category must be referring to preferred stock investments made by state and local economic development organizations. Preferred Stock like a hybrid between debt and equity (ownership). It is a secondary class of stock usually with no voting rights and only entitled to a stated dividend rate (like an interest rate) that has to be paid before common shareholders (the owners). Usually, the company pays the dividend for several years until they cash flow and then starts paying back the investment (principle) when the company is financially sound. On the other had if the investment is made and the company goes belly up the next year there is usually no recourse (repayment) because it is equity…not debt.
Preferred stock investments are great for cash strapped early stage startups who need time to get to cash flow. Rather than huge payments on a big SBA loan they can make interest only payments annually and principle when it is available (if ever). This is an excellent tool used by many economic development groups. Often, when you read about a state or the local EDC “giving” a company money, it is usually a preferred stock investment they are referring to.
There are times when a city will grant a company money but these are often large companies (like Fortune 500 companies), a sports team or essential service (like air travel, utilities, etc) they are trying to attract and they expect a large return on their investment from increased tax collections. But you are looking for money to start your company not expand your fortune 500 so this is hardly a help.
Financial Assistance Payment - In two words I can address this one “Social Services”. Sure you can get money to pay your bills…it’s called welfare. Can’t afford to rent go to the local housing office. Want to buy a home but don’t have a down payment look up the American Dream program. Child Care Assistance, Heating Bills, Food for the fridge…it’s all out there so long as you meet the low to moderate income requirements.
In my home town they run a program called “Saving Our Cents” where they will match your monthly savings 2 to 1, on up to $2000in savings. So you save two grand and your account will have six thousand dollars in it…pretty cool but hardly enough to go out and create a fortune.
Government Contracts - Government contracts are not free money. Every year the federal and state governments spend billions of dollars…some of that with small business. But, the federal government is like any other customer they want something in return - like a product or service.
At times, contracts will include funding for research and development, but these contract only go to established companies. In fact, most contracts require that you have been in business for two years and have experience selling to the government (usually through subcontracts). If you don’t meet the experience requirements they will require a certificate of competency to determine if you company can deliver on the contract.
So if you are a start up working out of your basement looking for free money government contract is probably the last place I would look (unless you have major contacts in the government procurement offices). I have clients who have been pursuing government contracts for four years or more without a sale…and they have been in business for over a decade. In any event it is never something for nothing.
So what is the end game?
I wish I had something witty or inspiring to tell you. The conversation that must be had when a client wanders in my office looking for grants or free money is often heartbreaking.
People want to believe that the business they are trying to start is noble and will be an asset to the community - providing good jobs, property taxes, and economic stimulus. Unfortunately unless that “stimulus” is in the order of 100 or more jobs and a tens of millions of dollars in additional investment by the owners, banks and investors they just are not going to be throwing money at you to get started.
On the other hand, I also want to tell you, Don’t Give Up for two reasons:
- I once consulted with a woman who was starting a fitness center in a rural town who was looking for grants. I told here there were no grants for that type of business and two weeks later she called me and said she found a program that was interested in bringing fitness to areas where there were limited options. They purchased all of her equipment for her and although I never verified the source I take her at her word.
- Who needs grants anyway?!? Over the last five years of doing this if I have learned one thing it is this; the person who walks in my office and says “I am going to start this business and nothing is going to stop me.” is almost always the person who is in business within the next six months. The person who walks in and says “Where is the free money?” is usually never seen again.
So pull yourself up by your bootstraps, look the world in the eye and say “I am going to do this!”
Donovan Wadholm
www.DIYBizPlan.com
02:32 pm | 0 recommendations | 2 comments
Mathew Lesko is my nemesis.
You know the crazy guy on late night infomercials prancing around in his question mark suit screaming about “Free” money to pay your bills…or to buy something…or to start a business?
For years now this guy has made a fortune selling publications that are full of information that is free and available to the public. There is nothing inherently wrong with charging for the convenience and reprinting cost of information that would have taken considerable time to gather and publish…that is not where I take issue.
In fact, there is no problem with telling people that there is grants, direct payments and assistance programs available for everything from paying your heating bill to starting a business…however slim the chances are of you getting any of them.
The problem is the tricky semantics he uses to make you think there is a lot of free money or grants out there.
For example a classic Lesko line is:
(Holding up a piece of paper) “Here…answer 15 questions and get a $4000 grant to fix up your home! Or fill out one page and get $150,000 to start a business.”
To the common person you might believe that the $150,000 is in the form of a grant because the proceeding program he spoke of was a grant. The fact is the document he is holding up is for an SBA guarantee on a small business loan…which is not a grant at all…it’s not even a low interest rate loan. But…if you read what he said carefully you will realize that he didn’t say it was a grant or even free money. He simply said that you can get $150,000 to start a business with that document…and that’s true IF you can find a bank to finance you and IF you have a business plan and IF you have a down payment and collateral, etc…
Need another example?
OK…his Free Government Money for Business website he lists among hundreds of other claims: “75,000 to create a job in North Dakota.”
Well I just happen to live in the Great State of North Dakota and I assure you there is no program that will give you $75,000 to create one job. There is however a program run by the Bank of North Dakota called Partnership in Assisting Community Expansion (PACE).
The PACE buy down is a grant. However, the grant money is used to reduce the interest rate of a loan you borrow up to 5 percentage points. The grant money comes partially from the Bank of North Dakota and the job creation Lesko is referring to is as follows: The borrower shall demonstrate that within one year, there will be a minimum of one job created and retained for every $75,000 of total loan proceeds.
But there are other requirements that must be met. 35% of the interest buy down money must be raised from a local Economic Development Group and they may have requirements of their own. For example minimum job creation requirement such as 50 or more jobs. In addition, the business has to be primary sector with more than 75% of their sales coming from out of state. Finally the job have to be created in specific industries such as manufacturing or value added processing. And all of this is predicated on getting a big loan in the first place…which is definitely not free money.
So you see the program is much more complicated than getting $75,000 to create a job in North Dakota.
So lesson #1 is to realized that not everything he talks about is free money. in fact according to Lesko’s own blog response to a detractor:
If your reporting ever did take you to one of our workshops or if you spoke with anyone who ever attended one of our workshops, you would learn that we never make promises about any government money being available to an individual or organization. The only thing we do promise is that if you are unsatisfied with one of our products you can return it for a refund.
So what are they offering…I will try to cover that in Part 2
Donovan Wadholm
www.diybizplan.com
09:25 am | 0 recommendations | Be the first to comment
This list reflects my experiences only, is based on no other research and is in no peticular order.
10. They had a well researched, well written business plan that backed the assumptions in their financial projections.
9. The business was an original idea or at the very least was different from the competition…they have several competitive advantages and/or served a niche.
8. They underestimated their market size and demand for their product or service.
7. They implemented structured employee training and standard operating procedures before they opened their doors.
6. They excuted a marketing plan beyond a grand opening and for longer than a few months.
5. They created a strong brand with immediate name recognition.
4. They overcapitalized their working capital account…i.e. they had lots of cash on hand.
3. They delivered exceptional customer service before, during, and after the sale.
2. They were in the right market, at the right location, at the right time.
1. They have an unending passion for what they do.
Donovan Wadholm
www.diybizplan.com
April 4, 2008
01:15 pm | 0 recommendations | Be the first to comment
The fact is that not all businesses will be successful. Some have even heard that 80% of new businesses fail by the 5th year, although this is disputed by many and evidence suggests that the failure rate is closer to 50-60 percent. Even so, there may come a time in your business venture when you start questioning wheather to stick with it despite the pain or quit, getting out before the pain gets worse.
I recently read a book by Seth Godin called The Dip: A Little Book That Teaches You When To Quit (And When To Stick) and the general idea behind the book is looking for the cues that should tell you when to quit and to push through knowing there is a better future. The “dip” is that point, in whatever venture you are pursuing, where things get hard and looking into the future there is only uncertainty.
At times when you push through the dip the rewards on the other side is that uphill climb to success. At other times you may languish at the bottom of the dip wasting time and resources you could be spending on another project. Or, as the author puts it himself in an interview with Guy Kawasaki “It’s time to quit when the things you’re measuring aren’t improving, and you can’t find anything better to measure.”
When a new business reaches that point, when they are in the bottom of the dip, there are only four things that they can do to stay in business: Put in More Equity, Get a Loan, Reduce Expenses or Increase Sales.
Most entrepreneurs do not have a bottomless pot of money that they can keep throwing at a project, in fact, the opposite it usually true. So the first thing that comes to the entrepreneur’s mind is another loan (or equity investment). But, a new loan is a short term solution to a long term problem.
If a company is burning cash, getting a shot in the arm from a working capital loan can help stem the bleeding for a while, but it also adds another payment on top of the mounting expenses that caused the problem in the first place. You need to change your business model or in the long run you will end up in the exact same spot a year later looking for another loan.
A change in business model can only take the form of the last two items on our list: reducing expenses or increasing sales.
Most business owners believe they run a pretty tight ship, especially if they are struggling financially and have cut costs numerous times to stay afloat. But I would challenge you to have an outside observer take an objective look at how you are operating your business. They may find a more efficient way of delivering the same products or services.
The truth is, the success of a company usually relies on the sustainable growth in sales over the long term. If you company has seen its sales plateau and you still are not cash flowing, there is a strong chance you will fail without a change in your business model.
A new business model could mean:
- attacking a new market - geographic or segment (B2B, B2C or B2G)
- launching a new product - complimentary or ancillary
- adding a service - such as repair, technical assistance or implementation
- A new marketing / branding campaign
- Addition of marketing or sales staff
Regardless of the model that is right for you, without a plan the addition of financing to a failing business usually digs the hole deeper rather than fixing the problem.
Before you go to your local lender for a working capital loan, dig that old businesses plan out of the filing cabinet, dust it off and review the assumptions you made that didn’t pan out. Make some new assumptions based on your new, more informed, knowledge of the marketplace as a current business owner.
Update the financial projections based on your historical financial statements to create a baseline pro forma cash flow. Then, perform a scenario analysis adding the changes that will occur with your new business model, both on the sales and expense side. Once you have a business model that cash flows based on reasonable and prudent assumptions then you can start looking for the financing to put your plan into action.
If you can’t find a model that works based on you current financial position, then it might be time to cut your losses. Build a plan to divest the company and minimize your losses. Speak with your current lender and make sure they are aware of your situation so that you can work out a scenario for liquidation where you get the highest dollar for your company’s assets. Then work out a plan to pay off the remainder over a period of time.
If you have come to the decision that quitting is the only reasonable option, know that most successful entrepreneurs failed at something in their past…some spectacularly! But, if you are like most entrepreneurs, the next big idea is just around the corner. And, if you failed gracefully, there will most certainly be someone out there who will provide you the funding to pursue your next venture.
Donovan Wadholm
www.DIYBizPlan.com
02:12 pm | 0 recommendations | Be the first to comment
Maybe it is a midwestern thing but lenders around here have a hard time just saying “No”.
Let me lay out a scenario for you:
- Client comes into my office and tells me about the ultimate business opportunity.
- We discuss the costs and determine whether the client has the resources and qualifications possible to successfully launch this venture.
- Client completes market research and we write a business plan and financial projections based on sound assumptions.
- Client goes to bank(s) and presents business plan.
- Bank drags their feet, hems and haws, comes up with things that need to be fixed in order to do the loan.
- Client fixes problem and fulfills requests.
- Bank drags their feet, hems and haws…another list…repeat
- Weeks pass with no forward motion.
- Client gets frustrated and gos to another bank.
- Client gets loan with no troubles.
This routine always costs the entrepreneur time and usually it costs some money, whether in the form or burned cash or opportunity cost. Now, somewhere between number 4 and number 7 above the scenario should have changed. Someone, namely the commercial lender, should have said; “No thank you I am not interested in your request.”
So how do you know if you are getting the runaround? There are some tell tale signs that a lender is not interested:
- They ask for an unreasonable amount of equity or collateral to reduce their exposure.
- They say that a non-present third party won’t approve the loan - usually a “credit board”, “underwriters” or “the SBA”.
- They question your abilities to run the business successfully - not specific criteria being met but just unsure about your personal abilities.
- They don’t get back to you promptly with a response usually within a week.
Some of the items on the above list can be legitimate.
For example if you have a project that has very little in Fixed Assets than a larger equity investment may be required. But I have experienced cases of fully collateralized loans where the lender wanted 35% equity or more where generally 20% would be sufficient.
There are other cases where a commercial lender told a client the SBA requires 30% equity to get the loan. Interesting, because the SBA’s policy is to; “not decline loans for lack of equity or collateral reasons”. When I called the regional SBA office I was told they had not even received an application. We then called the bank back and pressed the issue and were told it was the banks “internal SBA department” that had made the 30% equity requirement.
Sometimes a decline is legitimate. Sometimes they have a competitor in their portfolio already or they just don’t like your project because they have been burned on a similar one in the past. Sometimes it is not about you or your business but the lender’s personal feelings. In that case you just need to find another bank.
I can only venture a guess at why a lender would want to string potential borrowers along by not just saying “No”. My first inclination is that they are afraid of making the client mad and loosing their other business. If that is the reasoning, I believe they would loose far fewer clients by being honest and up front with them. Or in any event they will probably loose their business anyway when they switch to the bank that gives them a loan, a common courtesy.
I would like to suggest lenders learn to say one of three things upon final review of a business plan:
- No
- Yes let me write up the paperwork.
- Yes, if…
In the “Yes, if” scenario they could require more equity, more collateral, an SBA guarantee or some other criteria. But, it is important that there is a “Yes” behind that “if”. Then when the criteria is met there is not a second string of criteria to be met.
Donovan Wadholm
www.diybizplan.com
10:23 am | 0 recommendations | Be the first to comment
Looking back at April 1st there were several occasions for someone reporting bad news to smile quietly and say “April Fools!”.
Unfortunately, the one to legitimately play an April Fools joke on me was my eight year old son, who upon arriving at school said he forgot his backpack only to reveal he put it on under his coat. At least the spirit of the tradition was not lost on one person.
Upon arriving at work, I met with a business woman who, after two years in business, was struggling to gain a critical mass of clientele to keep her afloat. I could feel her anxiety as she answered my standard litany of questions. Everything I threw at her she had tried. She had implemented a textbook marketing plan including standard advertising campaigns, community promotion, customer referral systems, even some guerilla marketing techniques.
Despite these marketing efforts and running a tight ship controlling expenses, her clientel has hit a wall at just slightly over break even. And, to make matters worse she is coming up on her slow season. I was hoping for a quiet smile but it never came… How about a short-term working capital loan to stem the bleeding? Not the best strategy but with this person’s passion for their business surely they will pull through to profitability…right?
The conversation turned to the hypothetical; “What if I shutter the doors…what is my responsibility to my lease agreement?” A quick set of questions showed that she has three years left on a five year lease…which must be paid so long as she doesn’t have another person to occupy the space. So my recommendation was to keep in close contact with the landlord and their realtor to make sure the space is leased up as quickly as possible in the event she vacates. Luckily, the space is on a prime frontage road in the city, a small consolation for the possible failure of a labor of love.
Consulting sessions that end with “I am sorry…I wish I could help you more”, bring me down.
Shortly after this meeting, my business partner in our restaurant called to explain that one of our employees is quitting because they were held accountable for their cash till coming up short several times over the last few weeks. While he waited for my reaction I waited for him to break the silence with “April Fools!”.
When it didn’t come we discussed the situation. We had given them the benefit of the doubt on several occasions but after the total amount short bordered on $100.00 we started requiring them to make up the difference. Even with a $3000.00 point of sale system, individual employee “bank accounts” and controlled access from other employees we still had a problem. Theft? I wouldn’t like to think so…
They say that three things needs to be present for theft to occur: motivation (struggling financially - check), opportunity (access to the tills and petty cash - check) and lack of detection (why else would we invest in a $3000.00 POS System - no check mark here). Unfortunately, there are always ways to “game the system”. There are also ways of making input errors that cause a till to look short…but, none of these were present.
In every other way this person was an ideal employee. Excellent work ethic, motivated full-time employee with superior customer service. I believe we all consider ourselves a good judge of character when hiring employees.
My mind tells me this employee leaving is the right thing to happen.
My heart tells me that I may in fact be the April Fool.
Donovan Wadholm
www.diybizplan.com
March 3, 2008
09:24 pm | 0 recommendations | Be the first to comment
Bad Credit is not always a death knell when it comes to business banking. If there is a legitimate reason why you have poor credit some lenders can look past it. Typically, health problems, divorce, or a layoff (known as “life events”) can ruin a persons credit report through no fault of their own.
Banks look at six main criteria when judging a business loan: Credit, Capital, Collateral, Capacity, Character, and Conditions, explained further in our Commercial Financing article.
The point is that there are various criteria a lender will look at when underwriting the loan. The above criteria is NOT a checklist. Most projects are week in one area or another. Lenders reduce exposure by weighting the above criteria and making adjustments. So for example…if your project is light on collateral they will require more cash down payment. Bad credit, usually means a higher interest rate and additional collateral to secure the loan.
Most importantly…be upfront about your credit issues. If you try to hide it they will find out anyway and it will make you look dishonest. Just tell them upfront…you have a great opportunity, lots of character but you have a few spots on your credit.
Finally, the best day to start repairing your credit is TODAY! Don’t wait because your most recent credit history is the most important. If you show that the last X months were current (paid on time) then it becomes easier to overlook the old blemishes on your report.
Your Credit is Important…too important to be an unknown or ignored. Find out what your score is today at www.myfico.com, start repairing bad credit or any blemishes TODAY.
Good Luck
Mr BizPlan
09:16 pm | 0 recommendations | Be the first to comment
I meet and work with about 200 entrepreneurs a year who are interested in starting a small business. Every time I have a meeting with two or more people involved in the same venture, they always say the same thing:
“Jane and I are staring a XYZ Shop on the north side of town. I have the funds for the down payment and she has the skills and expertise. We are going to split the profits 50/50.”
To this I typically offer the following rules of a partnership:
- Never split the ownership of a business into equal shares. Why? Because nobody has veto power. When you have an equal number of owners (2, 4, 6, etc) votes for important decisions regarding the business can become deadlocked and business that can’t make decisions die quickly.
- There are extraordinarily few cases where 50/50 would be an appropriate split. If you are going to partner with someone do the following exercise. Take a clean sheet of paper and draw a line down the middle. Then write you name on the top of one side and your partners name on the other. Under your names write all of the things tangible (money, equipment, etc) and intangible (skills, technology, etc) that you bring to the business. 99% of the time you will find that one person has a list a mile long and the other is “riding on the cart while the other is pushing”. Use this list to promote discussion about what the appropriate ownership split should be.
- If you still decide to partner with this person you both have to sit down and discuss expectations. Conflict in a business partnership arises because you expectations and your partners differ. By discussing before hand the vast realm of possible situations you can set your expectations at the same level and write them down on paper.
- Which brings up to an operating agreement (or partnership agreement) or the rules that the partners must live by. At a minimum this agreement should address what each persons investment is, hours of work expected each week, salaries (if a corporation), share of profits, what happens if one partner wants to sell or quit or dies, and the size of financial obligation one partner can take on in the businesses name without the others signature (referred to as Agency Law).
As you can tell these are big issues. Partners who don’t have a serious discussion and implement an agreement eventually fail. A business partnership is a lot like a marriage or having you best friend as a roommate. Initially, everything is rosy and you both agree on everything…then the minute details of life (or in this case business) rear their ugly head. Prepare for that eventuality and set your expectations out on paper so that you can go back to it when disagreements arise. As they say “The most faded ink is better then the best memory”.
Good Luck!
Mr. BizPlan
www.diybizplan.com
