Getting your business off the ground
Ask FSB's experts explain financing options for new owners.
(FORTUNE Small Business) -- Dear FSB: I am currently putting together a business plan for a tea room in Dallas. The local SBDC (Small Business Development Center) office is helping get this project off the ground. I have allocated funds for about 30% of the startup amount, consisting of stocks, mutual funds and liquid assets. I have no experience in the food industry, just my passion for food and tea and my determination to succeed. In preparation for this project I am currently attending tea seminars and working to get certified for food handling.
How can I convince the bank to lend me the rest of what I would need? Since I have small amount of capital, should I buy or lease the equipment I'll need? I appreciate the help. Thanks.
- Caesar, Dallas, Tex.
Dear Caesar: Superstition holds that if you drop tea leaves inside your home, it will bring good fortune. Convincing a bank to lend you startup money for a tea business is a bit more complicated.
According to Bill Morland, a business counselor with the Service Corps of Retired Executives who helps aspiring business owners craft business plans in Orange County, Calif., banks are principally concerned with two basic issues: How will you pay back the loan, with interest? And what collateral does the bank have in case the loan defaults?
To convince the banks you'll be able to pay them, they'll want to see a solid business plan with at least three years of projected financials based on some logical premise and not pie-in-the-sky, says Morland.
"Since this is a pure startup business that has no financial history to go on it will be difficult to get a bank to buy into projections," he cautions.
This is particularly true if the business owner has no real experience in the actual day-to-day operations of the business they intend to open. You might want to spend some time working in a restaurant to demonstrate that you have practical experience in the industry.
Typically, you'll be required to put at least 20% to 30%of the projected startup costs into the business.
"Those assets you mentioned will most likely have to be liquidated and put into working capital, which makes collateral for the bank an issue," Morland says.
Usually, sources of collateral include negotiable securities, pension accounts, home equity and third party co-signers to guarantee the loan. Check with your SBDC contact about the possibility of an SBA loan. The SBA doesn't lend the money directly, but it provides the bank with guarantees in the event that the borrower defaults, reducing the risk for the bank.
Community banks might be more interested in the type of loan you're seeking than one of the major bank chains, says Morland.
"You can also list it at www.ibank.com for a small fee and shop it around to numerous banks across the country," he says.
As for your equipment, it's best to raise enough money to buy it outright, says Ed Levine, CEO of Vine Solutions, a Bay Area financial consulting firm for restaurant owners.
Leasing takes away some of the potential depreciation value, he explains. (The economic stimulus plan currently being considered in Congress may speed up depreciation.)
"When you own the equipment, you can write more of it off over five to seven years - though sometimes it is difficult to find the money in the beginning," he says.
Your business's beginning might be difficult, but stick with it.
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