My wife and I have wanted to start our own business for years. After a lot of
discussion we decided that the best fit for us would be to open a Tobacco and
Smoking Accessory retail shop, so I did a lot of research and spent well over
100 hours drafting a business plan. I made an appointment with our local
Small Business Development Center to discuss my business plan. The
appointment was last week and what I thought was going to be a meeting
reviewing and refining my business plan turned out to be an hour long session
of the counselor telling us how difficult it is to get financed for a
start-up. The whole meeting had a very negative tone to it and if I took her
information at face value, I would give up now. I am sure she was trying to
just be the "reality check" that every entrepreneur needs and I refuse to
give up on this dream until I have exhausted every option available to us to
get started. She did take a copy of my plan and told me she would review it
when she had the time to dedicate to it and get back to me with recommended
changes but did not give me any indication of how long that might take. I
have also registered with SCORE.org and have reached out for a local mentor
and am currently awaiting a response.
The numbers I have crunched show that we need $120,000 to get up and running
and cover 6 months worth of operating costs. My wife and I have $25,000 to
contribute, but no other real property or assets to use as collateral. I
haven't run our credit reports in almost a year so I know I will need to do
that soon, but the most recent ones I have we both have credit scores below
600. Over $66,000 of that initial costs will be direct purchases of retail
assets (display cases, POS Systems, walk-in humidor, inventory, etc) and I am
not sure if that would qualify as worthy collateral to a traditional lender.
I believe my business plan shows a very strong case for sustained success and
profitability, and combined my wife and I have over 20 years worth of retail
experience, and I have 10 years of active duty military service for
management experience.
My questions are:
What is the actual reality of securing financing for start-ups? In my mind
$95,000 is not that much money in the grand scheme of things, but I also
understand that it is a very large risk without collateral.
How much weight is placed on the strength of the business plan versus credit
history?
How difficult is it to find and "sell a business idea" to angel investors if
traditional financing falls through?
How many angel investors are happy with debt-equity only versus those who
want owner-equity in the businesses they invest in?
kmurray | Community Moderator |
11/7/2012 - 3:59 pm
Hi,
Sorry to hear about the challenges you're facing. You've gotten some great advice here and yours are all excellent inquiries. You'll find that good credit and a sound business plan are important. You can out the event calendar for other business events that might provide some help in your area, or you may also want to consider talking to someone else at the SBDC for a second opinion. One of our guest bloggers, Marco Carbajo, is a business credit expert. You may find his blogs insightful as well.
Hi,
Sorry to hear about the challenges you're facing. You've gotten some great advice here and yours are all excellent inquiries. You'll find that good credit and a sound business plan are important. You can out the event calendar for other business events that might provide some help in your area, or you may also want to consider talking to someone else at the SBDC for a second opinion. One of our guest bloggers, Marco Carbajo, is a business credit expert. You may find his blogs insightful as well.
Thanks kmurray,
I have also reached out to the score.org network and am receiving advice from
them as well. I sent my business plan to one of their counselors yesterday
that offered to review it and give advice for me. I will most definitely
check out Marco's blog and see what I can gather from him as well. All
knowledge is good knowledge and I am doing my best to get it from every
source available. Thanks for the link.
You asked about the actual reality of securing financing for start-ups.
Although most bank lenders have provisions in their policies and procedures
for startup loan financing, the reality is that startup loans are very hard
to get. In fact, from what little information you provided so far, I would
probably take as negative a tone as the counselor.
If I were to match your request against the general underwriting guidelines
of a bank lender that I am familiar with, you would be denied due to a couple
of reasons. 1) You do not meet the minimum credit score of 650. 2) The equity
falls below the 30% requirement in the case of loans whose proceeds will be
used for startup costs. Please note that this does not mean that curing those
two underwriting exceptions gets you a loan. It only means that curing them
both would get you considered.
You got to look at it from the point of view of a lender. While having an 85%
guarantee on loans under $150,000 is nice, we are not really comfortable
granting the loan unless there is an appropriate primary source of repayment.
A good lender does not give a loan hoping to liquidate the collateral, we
give loans hoping that the business is a success and we get paid with the
cash flow.
If I were you, I would work on the following:
a) Improve your credit score.
b) See if you can get additional investors even if it takes giving a portion
of the equity. If you keep investors under 20% ownership, they will more than
likely not be required to guarantee loans.
c) Make sure you include a 2-year projection, with the first year on a
month-by-month basis.
d) Well reasoned assumptions should be included in the projection.
You asked about the actual reality of securing financing for start-ups. Although most bank lenders have provisions in their policies and procedures for startup loan financing, the reality is that startup loans are very hard to get. In fact, from what little information you provided so far, I would probably take as negative a tone as the counselor.
If I were to match your request against the general underwriting guidelines of a bank lender that I am familiar with, you would be denied due to a couple of reasons. 1) You do not meet the minimum credit score of 650. 2) The equity falls below the 30% requirement in the case of loans whose proceeds will be used for startup costs. Please note that this does not mean that curing those two underwriting exceptions gets you a loan. It only means that curing them both would get you considered.
You got to look at it from the point of view of a lender. While having an 85% guarantee on loans under $150,000 is nice, we are not really comfortable granting the loan unless there is an appropriate primary source of repayment. A good lender does not give a loan hoping to liquidate the collateral, we give loans hoping that the business is a success and we get paid with the cash flow.
If I were you, I would work on the following:
a) Improve your credit score.
b) See if you can get additional investors even if it takes giving a portion of the equity. If you keep investors under 20% ownership, they will more than likely not be required to guarantee loans.
c) Make sure you include a 2-year projection, with the first year on a month-by-month basis.
d) Well reasoned assumptions should be included in the projection.
Thanks for the information loanuniverse. I did visit the website in your
signature and discovered that what you said was pretty accurate. As for your
suggestions:
The only thing at this point that will help our credit score is time, we're
waiting for negative things to fall off which I am sure isn't the best way to
deal with it. Do you know if any of the "for pay" credit repair services are
worth the money? It seems to me from my knowledge of credit histories/scores
that there really isn't anything you can do about negative things in your
credit report unless there are errors so I am hesitant to pay someone to do
something that they can't do.
As for the additional investors, given the information that I originally
gave, what would be considered a good amount to have down in order to be
considered a bankable risk? 40, 50, 75%?
I did include a month-by-month projection for the 1st year, I'll go back and
add an additional year now.
My assumptions are as realistic as I can make them. I did my best to show
both best and worst case scenarios.
Thanks for the information loanuniverse. I did visit the website in your signature and discovered that what you said was pretty accurate. As for your suggestions:
The only thing at this point that will help our credit score is time, we're waiting for negative things to fall off which I am sure isn't the best way to deal with it. Do you know if any of the "for pay" credit repair services are worth the money? It seems to me from my knowledge of credit histories/scores that there really isn't anything you can do about negative things in your credit report unless there are errors so I am hesitant to pay someone to do something that they can't do.
As for the additional investors, given the information that I originally gave, what would be considered a good amount to have down in order to be considered a bankable risk? 40, 50, 75%?
I did include a month-by-month projection for the 1st year, I'll go back and add an additional year now.
My assumptions are as realistic as I can make them. I did my best to show both best and worst case scenarios.
Regarding the improvement of your credit scores, there are certain steps that
you can take to improve them. The reporting of consumer credit information is
very regulated, and you might be able to dispute some information if it
failed to comply with the Fair Credit Reporting Act. You can get more
information about that on websites that deal with it. Do not pay for anybody
to do it as it is much better to do it personally, and try to get the
information about how to proceed from a place that is not trying to sell you
a credit repair program.
About being bankable, the honest truth is that startups are not bankable at
any percentage in the eyes of some lenders. Try to find a local bank that is
amenable and work with the lender to qualify. I have seen several hundred
loans in my working life, and do not remember ever seeing one for a startup
without some kind of collateral {from silver bars to real estate}.
Thanks for the response and I understand I am in for an uphill battle to get
off the ground and I am prepared for that. If starting your own business were
easy everyone would do it.
As far as the financial portion of my business plan goes I thought it best to
tackle it in reverse. I calculated my fixed expenses and then worked out what
my sales would have to be in order to cover them, and then decide if those
potential sales were achievable based on available market share. I found with
as little as a 1% market share I could meet and exceed my monthly expenses.
The only number I really pulled out of thin air was my gross profit margin,
which I know is a HUGE portion of the equation to be just a made up number.
Without having a business license I am unable to see prices from a large
portion of the distributors I will use to get my goods, but I have been able
to get some. The number I came up with in my plan (60%), I got from taking
the profit margin of the goods that I do have prices for (between 150-300%)
and talking to a store close to where I live that I won't be in direct
competition with and hearing his profit margin on some of his tobacco
products (5%) and averaging them out. The SBDC counselor told me that she
would reach out through her network and see if she could find the average
gross profit margin for this type of store and report back to me what she
learned.
I know that my credit history is a very negative aspect of my overall
picture. Without giving away too much personal history I will say that my
credit is shot because I filed for bankruptcy over 6 years ago. The
bankruptcy was dismissed, but it is still on my history. A large majority of
my past creditors charged off my debt after the bankruptcy which I know looks
incredibly bad, but all of that is almost 7 years old. The only credit I have
had since then was a vehicle loan that I had when I filed the bankruptcy and
paid off in full around this time last year. A large portion of my wife's
"bad credit" is all medical expenses, which I understand some lenders will
look past when judging credit worthiness. That all being said, I am not
counting on getting approved for a traditional loan. Hope for the best, plan
for the worst as they say.
As for going for used equipment, I considered that. The reasons I am gunning
for new equipment is to beat out my local competition. The other stores in my
area all have the "run down used equipment" look to them and I am wanting to
provide a cleaner, newer, more professional looking shopping establishment in
order to drive customers to choose my store over my competitors. I will go
the used route if I have to, but I would really like to avoid that if at all
possible.
I have been in contact with the landlord's agent about the space I want. I
have cultivated what I consider to be the start of a working relationship
with him via email and have negotiated a soft price for the NNN lease at a
fair or below market value. He seems to be genuinely helpful and interested
in getting the space filled, but I also understand he is a realtor and wants
to make a profit. The space has been empty for several years so I know they
want/need to get somebody in it. I wasn't aware that negotiating a lease
based off of a percentage of revenue was even an option so I will consider
approaching him about that as well. Thanks for the tip.
My biggest roadblock right now is that I don't have a business license yet. I
can't talk to distributors without a business license, I can't get a business
license without an address, and I can't get an address without having a
lease. I don't want to commit to a lease without knowing I can get the
financing I need.
Thank you for all the advice and I will take it all under advisement. I don't
want to approach a loan officer until I get my business plan reviewed by
someone so I am waiting to hear back from the SBDC counselor before moving
forward. I have also reached out to mentors via the SCORE.org network so I am
working with them as well.
Great that you want to get into business for yourself. But, not to be a show
stopper, the SBDC counselor was telling you correctly.
Put yourself in the shoes of a lender. Would you lend money to you? Your
credit is below the 700 minimum - which means that you do not pay your
obligations - even though you have agreed to pay them.
Banks and other lenders want to get repaid - they want their principal and
interest back. How do you plan on repaying them? From some calculations in a
business plan? Did you adjust the numbers so that they work for you? What
research do you have backing up your ability to hit those numbers?
Lenders tend to look backwards and see if a business has made profits in the
past, then, given that track record, they should be able to make them in the
future. But, if you are just basing your ability on your business plan, who
knows if will meet those numbers.
Would you give the keys to your brand new car to a person you were unsure of
in regards to their ability to drive? Well, a lender will not give you money
if they are unsure of your ability to repay.
But, that does not mean that your dream is shot.
If your credit is bad - start getting it fixed. Your personal credit really
does matter and matters a lot - now and in the future.
You have some money to put down - can you spread that out more - find used
equipment or seek out discounts. The idea is to make your $25,000 go further.
Can your work deals with the suppliers of the goods you want to sell? See if
they will give you trade terms - allowing you 60 or 90 days or more to sell
those products before you have to pay them for that inventory. Or, ask them
if they have any financing deals.
Regarding your locations - have you talked with landlords? Maybe you can
strike a deal - say offer them a certain percentage of your revenue for the
first year or two until your get your business on a solid footing - then go
to a fixed monthly payment. If that space is empty - the landlord just might
go for some kind of deal. Just don’t take no for an answer.
Given what you said here - it is really unlikely that you qualify for a
business loan. But, there are other ways to finance. You might look into
personal loans. Or, use your retirement funds to initially fund your business
- then, as the business grows, pay those funds back. Ask friends and family
to loan you money or invest in your business - even if they don't they might
know of someone else who will.
You might even be able to find a local investor in your community - you just
have to get out there and network. You never know unless you ask.
If your still unsure about getting a regular business loan - go talk to a
loan officer and get it straight from the horses mouth.
kmurray | Community Moderator | 11/7/2012 - 3:59 pm
jrafferty | Window Shopper | 11/7/2012 - 6:06 pm
I have also reached out to the score.org network and am receiving advice from
them as well. I sent my business plan to one of their counselors yesterday
that offered to review it and give advice for me. I will most definitely
check out Marco's blog and see what I can gather from him as well. All
knowledge is good knowledge and I am doing my best to get it from every
source available. Thanks for the link.
loanuniverse | Window Shopper | 11/6/2012 - 7:32 pm
Although most bank lenders have provisions in their policies and procedures
for startup loan financing, the reality is that startup loans are very hard
to get. In fact, from what little information you provided so far, I would
probably take as negative a tone as the counselor.
If I were to match your request against the general underwriting guidelines
of a bank lender that I am familiar with, you would be denied due to a couple
of reasons. 1) You do not meet the minimum credit score of 650. 2) The equity
falls below the 30% requirement in the case of loans whose proceeds will be
used for startup costs. Please note that this does not mean that curing those
two underwriting exceptions gets you a loan. It only means that curing them
both would get you considered.
You got to look at it from the point of view of a lender. While having an 85%
guarantee on loans under $150,000 is nice, we are not really comfortable
granting the loan unless there is an appropriate primary source of repayment.
A good lender does not give a loan hoping to liquidate the collateral, we
give loans hoping that the business is a success and we get paid with the
cash flow.
If I were you, I would work on the following:
a) Improve your credit score.
b) See if you can get additional investors even if it takes giving a portion
of the equity. If you keep investors under 20% ownership, they will more than
likely not be required to guarantee loans.
c) Make sure you include a 2-year projection, with the first year on a
month-by-month basis.
d) Well reasoned assumptions should be included in the projection.
jrafferty | Window Shopper | 11/7/2012 - 6:03 pm
signature and discovered that what you said was pretty accurate. As for your
suggestions:
The only thing at this point that will help our credit score is time, we're
waiting for negative things to fall off which I am sure isn't the best way to
deal with it. Do you know if any of the "for pay" credit repair services are
worth the money? It seems to me from my knowledge of credit histories/scores
that there really isn't anything you can do about negative things in your
credit report unless there are errors so I am hesitant to pay someone to do
something that they can't do.
As for the additional investors, given the information that I originally
gave, what would be considered a good amount to have down in order to be
considered a bankable risk? 40, 50, 75%?
I did include a month-by-month projection for the 1st year, I'll go back and
add an additional year now.
My assumptions are as realistic as I can make them. I did my best to show
both best and worst case scenarios.
loanuniverse | Window Shopper | 11/14/2012 - 3:37 pm
you can take to improve them. The reporting of consumer credit information is
very regulated, and you might be able to dispute some information if it
failed to comply with the Fair Credit Reporting Act. You can get more
information about that on websites that deal with it. Do not pay for anybody
to do it as it is much better to do it personally, and try to get the
information about how to proceed from a place that is not trying to sell you
a credit repair program.
About being bankable, the honest truth is that startups are not bankable at
any percentage in the eyes of some lenders. Try to find a local bank that is
amenable and work with the lender to qualify. I have seen several hundred
loans in my working life, and do not remember ever seeing one for a startup
without some kind of collateral {from silver bars to real estate}.
jrafferty | Window Shopper | 11/6/2012 - 5:30 pm
off the ground and I am prepared for that. If starting your own business were
easy everyone would do it.
As far as the financial portion of my business plan goes I thought it best to
tackle it in reverse. I calculated my fixed expenses and then worked out what
my sales would have to be in order to cover them, and then decide if those
potential sales were achievable based on available market share. I found with
as little as a 1% market share I could meet and exceed my monthly expenses.
The only number I really pulled out of thin air was my gross profit margin,
which I know is a HUGE portion of the equation to be just a made up number.
Without having a business license I am unable to see prices from a large
portion of the distributors I will use to get my goods, but I have been able
to get some. The number I came up with in my plan (60%), I got from taking
the profit margin of the goods that I do have prices for (between 150-300%)
and talking to a store close to where I live that I won't be in direct
competition with and hearing his profit margin on some of his tobacco
products (5%) and averaging them out. The SBDC counselor told me that she
would reach out through her network and see if she could find the average
gross profit margin for this type of store and report back to me what she
learned.
I know that my credit history is a very negative aspect of my overall
picture. Without giving away too much personal history I will say that my
credit is shot because I filed for bankruptcy over 6 years ago. The
bankruptcy was dismissed, but it is still on my history. A large majority of
my past creditors charged off my debt after the bankruptcy which I know looks
incredibly bad, but all of that is almost 7 years old. The only credit I have
had since then was a vehicle loan that I had when I filed the bankruptcy and
paid off in full around this time last year. A large portion of my wife's
"bad credit" is all medical expenses, which I understand some lenders will
look past when judging credit worthiness. That all being said, I am not
counting on getting approved for a traditional loan. Hope for the best, plan
for the worst as they say.
As for going for used equipment, I considered that. The reasons I am gunning
for new equipment is to beat out my local competition. The other stores in my
area all have the "run down used equipment" look to them and I am wanting to
provide a cleaner, newer, more professional looking shopping establishment in
order to drive customers to choose my store over my competitors. I will go
the used route if I have to, but I would really like to avoid that if at all
possible.
I have been in contact with the landlord's agent about the space I want. I
have cultivated what I consider to be the start of a working relationship
with him via email and have negotiated a soft price for the NNN lease at a
fair or below market value. He seems to be genuinely helpful and interested
in getting the space filled, but I also understand he is a realtor and wants
to make a profit. The space has been empty for several years so I know they
want/need to get somebody in it. I wasn't aware that negotiating a lease
based off of a percentage of revenue was even an option so I will consider
approaching him about that as well. Thanks for the tip.
My biggest roadblock right now is that I don't have a business license yet. I
can't talk to distributors without a business license, I can't get a business
license without an address, and I can't get an address without having a
lease. I don't want to commit to a lease without knowing I can get the
financing I need.
Thank you for all the advice and I will take it all under advisement. I don't
want to approach a loan officer until I get my business plan reviewed by
someone so I am waiting to hear back from the SBDC counselor before moving
forward. I have also reached out to mentors via the SCORE.org network so I am
working with them as well.
BMT | Window Shopper | 11/6/2012 - 4:57 am
stopper, the SBDC counselor was telling you correctly.
Put yourself in the shoes of a lender. Would you lend money to you? Your
credit is below the 700 minimum - which means that you do not pay your
obligations - even though you have agreed to pay them.
Banks and other lenders want to get repaid - they want their principal and
interest back. How do you plan on repaying them? From some calculations in a
business plan? Did you adjust the numbers so that they work for you? What
research do you have backing up your ability to hit those numbers?
Lenders tend to look backwards and see if a business has made profits in the
past, then, given that track record, they should be able to make them in the
future. But, if you are just basing your ability on your business plan, who
knows if will meet those numbers.
Would you give the keys to your brand new car to a person you were unsure of
in regards to their ability to drive? Well, a lender will not give you money
if they are unsure of your ability to repay.
But, that does not mean that your dream is shot.
If your credit is bad - start getting it fixed. Your personal credit really
does matter and matters a lot - now and in the future.
You have some money to put down - can you spread that out more - find used
equipment or seek out discounts. The idea is to make your $25,000 go further.
Can your work deals with the suppliers of the goods you want to sell? See if
they will give you trade terms - allowing you 60 or 90 days or more to sell
those products before you have to pay them for that inventory. Or, ask them
if they have any financing deals.
Regarding your locations - have you talked with landlords? Maybe you can
strike a deal - say offer them a certain percentage of your revenue for the
first year or two until your get your business on a solid footing - then go
to a fixed monthly payment. If that space is empty - the landlord just might
go for some kind of deal. Just don’t take no for an answer.
Given what you said here - it is really unlikely that you qualify for a
business loan. But, there are other ways to finance. You might look into
personal loans. Or, use your retirement funds to initially fund your business
- then, as the business grows, pay those funds back. Ask friends and family
to loan you money or invest in your business - even if they don't they might
know of someone else who will.
You might even be able to find a local investor in your community - you just
have to get out there and network. You never know unless you ask.
If your still unsure about getting a regular business loan - go talk to a
loan officer and get it straight from the horses mouth.
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