-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.