Know the real costs of starting a business

@Money May 14, 2012: 7:45 PM ET
entrepreneurs understanding business costs

Sandi Bryant, 48 and Jesseca Randall, 25

(Money Magazine) -- How can you beat the odds if you want to join the boomerpreneur boom and start your own company after 50? MONEY put that question to small-business experts and dozens of fiftysomething entrepreneurs for their best advice.

This is the third of three articles on how to become a boomerpreneur. This one will help you understand the real costs of starting up a business and how to finance with caution. You can also see if you've got what it takes to own your own business and how to put time on your side, and to see what lifestyle changes starting your own business will call for.

After a deal to become a partner in the pharmacy where she worked fell through in 2009, Sandi Bryant, then 45, decided to open a long-term care pharmacy service in Fairview, N.C. She projected startup costs of $300,000. Among other things, that would require using $100,000 from her 401(k) and putting her home up as collateral to secure $150,000 in financing. Understandably, she and her husband were anxious: "There was a lot at stake if the business didn't take off."

To see whether the risk would be worth it, she painstakingly calculated how many prescriptions she'd have to fill to break even. "Once I ran the numbers, I was confident I'd see a profit in the first year," she says, and she was right: Americare Pharmacy broke even after eight months.

She's now paying herself a $150,000 salary and expects to clear her debt in two years. As for her retirement, she's again funding an IRA and considers the business a big part of her nest egg.

Almost half of potential entrepreneurs ages 44 to 70 expect to use their personal savings to launch their ventures, a survey by baby boomer think tank Civic Ventures found. While older owners often have more resources, diverting those savings into a business is dicey.

"It's the opposite of diversification," says Colorado Springs financial planner Mary Alpers. Instead of dialing back your risk, as you normally should at this age, you're concentrating in something with a 50% chance of failure. Whether you can afford to do so depends on how much you have and how flexible you can be.

How to do it

Figure out the tab to get going. "Most entrepreneurs grossly underestimate startup costs," says Pewaukee, Wis., financial planner Kevin Reardon. With less than 20 years to retirement, however, the effects of spending more than you'd intended will be keenly felt. Get a realistic appraisal by talking to owners of similar businesses. Remember, those startup costs include living expenses until you can pay yourself a sufficient salary (a spouse's job can help).

See what you'll be giving up. To decide how much skin you can put in the game, "you've got to look at the opportunity costs," says Mary Beth Izard, startup consultant and author of "BoomerPreneurs". The biggest impact will likely be on your retirement.

First, use T. Rowe Price's retirement income calculator to estimate what you can expect to collect after you leave the workforce based on your current situation. Then run the numbers as if you'd invested -- and lost -- your startup costs.

Are you willing to live on that or work longer to recover? You may also have to suspend saving for retirement. Halting $15,000 in annual contributions for three years at 50 will leave you with $114,000 less at retirement, assuming 6% annualized returns and quitting at 67, says Alpers. At a 4% withdrawal rate, that's $4,400 less in year one, more each year as you adjust for inflation.

Get the rest of the clan on board. When Bob Flynn and Ray Schofield launched GreenRide, an environmentally friendly shuttle service, it was an adjustment not just for them but for their families as well. Both stopped saving for their children's education. As a result, Schofield's son took loans for college. Flynn's son will attend a state school and live at home to save money. "Not the college experience we'd hoped for him," says Flynn.

The lesson? Understand that your new venture doesn't just mean tradeoffs for you. "You have to look at how the business will affect your whole family," says Alpers. Discuss ways in which you're willing to be flexible, whether that's working longer or sending the kids to a public college -- and what's nonnegotiable. Make it clear that the tightfisted times won't last forever.


Unable to fund GreenRide solely from their own pockets, Flynn and Schofield struggled to line up financing. "We approached a lot of banks, but they said, 'If you're not making money, we're not giving you a loan,'" recalls Flynn.

They eventually turned to a banker they had worked with at their old jobs and secured an SBA-backed loan for $250,000. But both had to put up their homes as collateral. "We put our lives on the line to do this," says Flynn. "There was little room for error."

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Borrowing for your business can be just as damaging as tapping your savings. And tying your personal assets to your debt ratchets up your risk. Flynn and Schofield are paying down that debt from GreenRide's revenue, but "we're still really exposed if the business fails," says Flynn. If you must borrow, look for a better way.

How to do it

Apply as a business. As long as your operation is a limited liability or S corporation, the bank can't come after your assets if you default, unless you've put them up as collateral.

It can be difficult to get a bank or an SBA-backed loan unless you're making money. But a slew of new websites -- Biz2Credit, Boefly, and Lendio -- aim to pair small businesses with banks and credit unions that are eager to lend, even to startups. By going this route, you may also find lower rates than a big bank would offer.

Vendor financing is another option: Ask the companies you do business with for a line of credit (pharmacy owner Sandi Bryant got a $100,000 one from a drug company).

Go to your network. If you're turned down for a business loan, consider tapping friends and family. "At this age, you're more likely to have a network with deep pockets," says Lesa Mitchell, vice president at the Kauffman Foundation.

Lay out the terms on paper. While you have to pay the minimum interest rate set by the IRS -- search "index of applicable federal rates" at -- that's lower than bank rates.

Reduce your exposure. Rather than use your home as collateral, ask a friend or relative if they would be willing to guarantee the loan as a cosigner. Or pool resources with a partner so you can borrow less. If you must put your own assets on the line, make paying back those loans a priority.

As for how much debt to take on, think about your monthly payments: The SBA guideline is that debt payments should be no more than half your business's net income.

Stephanie Ringer, who now runs WorkShop, the Creative Workplace, borrowed about half of the $64,000 she needed to get the corporate meeting space started, plus used a $25,000 line of credit to cover some first-year costs. The money coming in from existing clients enabled her to pay the loan back almost immediately.

Five years later, WorkShop has grown steadily. Ringer has a chief numbers guru to handle finances, a director of lasting impressions for customer service, and a director of possibilities on sales. And she is expanding into giving speeches and private coaching. "I like being in charge of my destiny," she says. "I won't work for anyone else again."

How to be a boomerpreneur:

Buy a biz that's up and running

Start a company from scratch

Know the real costs

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Correction: An earlier version of this article misstated that almost half of entrepreneurs, ages 44 to 70, used personal savings to launch a business, according to a survey. The survey was actually of potential entrepreneurs, half of whom expected to use their personal savings to launch their ventures.  To top of page

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