Finance Your Own Business. Garrett Sutton

      Avoid High Salaries and Entertainment Expenses

      Lenders want their money to be applied to the business. They don’t want that money going to your salary and your enjoyment. They want you committed to the business by taking a low salary at the start and foregoing the perks of larger businesses.

      A Winning Business Plan

      There is considerable debate about whether a business plan is a necessity. Some entrepreneurs say they either never created a business plan, or if they did, never used it. And it’s true that in certain circles (especially those trying to raise money in Silicon Valley) a “pitch deck” is considered more appropriate than a formal business plan. (We will discuss the pitch deck in more detail in Chapter 14.)

      But banks and other financial institutions tend to be traditionalists, and they often want to see a well thought out and well drafted business plan. (In certain countries, such as Germany and Peru, a business plan is an absolute necessity.) Not only does a business plan serve as a road map for where you are headed but for lenders it is the starting point of the journey. It also forces you to ask hard questions about your business and where you see it headed. Those are the same questions that a bank or other lender will ask. The proper drafting of a business plan is a book unto itself. Please consider reading Garrett Sutton’s Writing Winning Business Plans.

      Even the SBA says a business plan is “an essential roadmap for business success.” SBA loans are up next…

Chapter 4

      SBA Loans

      For years, Leslie had dreamed of opening her own one-stop event shop that combined her exceptional baking skills, her background in design, and her experience as a florist. Having worked part-time for years for a well-established florist in Austin, Texas, Leslie had aspirations of taking over the shop when the owners retired, which they’d announced would be soon.

      Leslie, was anxious to get started. But then, the flower shop owners told her that they had decided not to retire after all. It was time for Leslie to take matters into her own hands.

      The business plan she’d been tinkering with for years became her sole focus. Despite being in the midst of the worst economic downturn since The Great Depression, Leslie worked feverishly with her local Small Business Development Center to formulate a comprehensive, realistic, thorough business plan for the flower shop.

      “The flower shop seemed like the hardest hurdle,” Leslie says. “Getting a retail base and a clientele so that it can sustain itself seemed like the best way to start, and then down the road I could expand to include the culinary aspect. You have your first-year goals, then your five-year, your ten-year … but this was the best place to start.”

      That same month, Leslie’s counselor at the Small Business Development Center advised her to apply for an SBA-backed loan, as part of a program that was set to expire at the end of April. The center had worked with a bank in Florida in the past, and had been very helpful with their advisees; Leslie’s plan had a shot, and it was worth applying.

      Leslie filled out the 7-page application, and submitted her business plan, along with a lot of other documentation, to the bank, and by the end of March, she learned that she’d been approved for a $50,000, SBA-backed Community Express Loan, as part of the bank’s Express Capital Loan program.

      Leslie still needed to come up with the 10 percent down payment on her downtown Austin location—the loan wouldn’t cover this. Fortunately, Leslie had also entered a business plan competition, and she learned in April that her plan had taken third prize. Her winnings enabled her to make the down payment.

      Leslie opened her shop in the summer, and began making payments to the bank just one month after receiving her disbursement. “The loan was my working capital. I was able to get the bills paid and buy some inventory,” she says, explaining that she had made a practice of collecting deep-discounted inventory over the years, which really kept her initial costs down. “Being able to have extra capital in the first six months, when I was still building a client base, was really important.”

      Within her first nine months, her business had hired three part-timers, took on an intern/business assistant, been ranked by Austin’s local alternative weekly paper among the top three florists in town on its “Best of Austin” list, and broke even financially. “I’m still not taking a salary yet,” Leslie says a year and a half after opening her doors, “but the business is now holding its own. We did $250,000 in our first year.”

      Leslie says that although her SBA-backed loan was relatively small in comparison to some other business loans out there, without it her dream might not have come true—at least, not so quickly.

      Leslie is among a growing number of Americans who have been able to start or grow their businesses thanks to the Small Business Administration, which guarantees privately funded loans through several loan programs that target a variety of businesses. The SBA now facilitates the lending of tens of billions of dollars every year. And for many businesses, these loans mean the difference between being in business and closing their doors (or never opening them in the first place).

      The SBA’s Loan Programs

      Businesses usually seek capital for one of two reasons: 1) They’re in survival mode, trying to start up or simply stay in business, or 2) They’re looking to expand.

      Businesses in survival mode are looking for subsistence funding just to stay alive. In the case of start-ups, they need money to secure locations, purchase materials and inventory, develop marketing materials, and pay the bills so they can keep their lights on. For other businesses that may have already been in existence, they’re in survival mode because of any number of factors—an economic downturn, construction blocking their entrance, or the emergence of a new competitor, for example.

      On the other hand, expansion-mode businesses have a track record of success. They’re profitable and need to grow to increase profits and meet consumer demand. Banks like expansion-mode businesses.

      But it’s often survival-mode businesses, particularly in a tough economic times, that are seeking loans. Perhaps they’ve exhausted all their families’ and friends’ resources, have maxed out their credit cards, or simply can’t afford to compete without an injection of funds.

      Meanwhile, most commercial lending banks see survival-mode businesses as a great risk; they often prefer lending to businesses that are expanding, who can prove their accomplishments and have considerable assets that ensure they can pay back their loans. And this simply isn’t possible for many small businesses. Here’s where the SBA steps in.

      First, it’s important to note that the SBA itself actually doesn’t do any lending. Rather, it sets guidelines for loans made by traditional lenders that it partners with, then acts as a guarantor for those loans made to business owners who might have trouble qualifying for traditional bank loans. The guaranty provided by the SBA on a large percentage of the loan ensures the bank that the majority of the loan will be paid back.

      To get an SBA loan, a business owner goes to one of the SBA’s partner banks or lending institutions and applies for the loan directly through this lender. If approved, the loan is eligible for an SBA guaranty, which is a percentage that represents the portion of the loan that the SBA will repay the bank if the business owner defaults on the loan.

      The SBA guaranty, at the time of this writing, covers up to 85 percent of the loan amount, which is a considerably lower-risk proposition for banks than loaning to unproven businesses.

      The Guaranteed Loan Programs offered by the SBA vary depending on your needs and the size of your business. One of the loan programs is:

      Basic 7(a) Loan Program

      The 7(a) loan, according to the SBA’s website, provides eligible borrowers with up to $5 million in capital for “starting, acquiring and expanding a small business. This type of loan is the most basic and the most used within SBA’s business loan programs.” All owners of a business with at least a 20 percent stake in ownership must personally guarantee the