Walking the Plank
August 29, 2019
By Aundrea Wilcox | Executive Director, KOSBE
Before jumping into the sea of entrepreneurship and new business ownership without a life preserver, is there a fit test you should take? Beyond determining that there is a need or demand for your product or service, what else is required to be successful? My Four-Way Startup Fit Test is simple:
Do you have money or access to it?
Are you passionate about your business idea?
Do you have a plan in writing?
Are you competent to make this happen? In other words, do you have the necessary knowledge and experience, or connections and commitment from supporters who will share these with you generously and as needed?
Have Adequate Moolah, Gwap, or Dough!
How much cash do you have in your checking account right this minute? Do you have any savings? When is the last time you ran your credit report? If you have no cash in the bank at the present time, you need to give your decision to start a business more serious thought. Where will the money come from if you don’t have it? The first place to look for money is within. If you cannot put any money down yourself, why would you expect your friends, family, or community bank to pitch in? If your credit is in shambles, you need to take responsibility for it, and do whatever you can to fix it—not pressure your significant other or your parents to set up a business for you in their name. Ignoring the problem is not going to make it go away.
And, if you are smart, you won’t believe the hype that there are grants available to start a for-profit business. The fact is no one is handing out free money to entrepreneurs—including women, minorities and other disadvantaged groups. As for angel investors, only 16 percent of the fastest-growing and most successful companies in the United States had venture investors. Furthermore, angels are usually accessed through networking. A rock-solid business plan with professional support is usually required to get to an investor’s slightest attention, since business risk is usually the primary consideration, not ownership sharing.
Don’t rule out taking on a business partner. Having a business partner doesn’t have to be an ordeal. The key is to develop a written agreement that clearly specifies how much equity is attributed to each partner, how profits and losses will be distributed, each partners pay and compensation, and the process for dissolution of assets upon termination among other things. If you choose to have one, a partner should complement your skill set and add value to the business. Don’t choose to partner with someone who only brings dead weight to the table.
Still interested in starting a small business? Maybe you already took a chance and went to the bank and they told you “Sorry, I wish we could help, but we can’t right now. We’ve got regulators breathing down our necks.” I wouldn’t be surprised. If you went to the bank without a business plan, that was your first mistake, and you could quite possibly never recover from it. If you didn’t know how much to ask for, that was your second mistake. When the lender asked you how much sales revenue you project from the business, did you look at your spouse or friend and simply shrug your shoulders? This is a banker’s fatal favorite. No wonder you didn’t get the loan.
Or, maybe you didn’t do any of these things. You went to the bank with a solid plan, knew exactly how much you needed, and could easily demonstrate your ability to pay it back. Still, the answer was “I’m sorry, but no.” Just because your bank turned you down doesn’t automatically mean you can’t get a small business loan. There are other sources of capital that you can explore if you have good credit. You may have better luck with a non-traditional or non-local lender. Don’t give up so easily.
Contact the nearest Small Business Administration (SBA) district office and ask for a list of their top SBA lenders in your region. If you live in, or the business is located in a rural area, you may be eligible to apply for a rural business microloan through a state program. Also, numerous cities and towns have established downtown redevelopment programs to meet their community’s specific needs. Until you have a track record, this may be the only option you have for a startup small independent restaurant.
Too many small businesses are under-capitalized from the onset, and too many fail because they underestimate their short-term and long-term cash needs. Multiply whatever preliminary amount you think you need to get started by at least three. If you are buying an existing business or starting a new business with inventory or equipment that you already have, how soon will it be before you need to update or replace it? Do you have cash on hand or a line of credit available for build-out and leasehold improvements, such as lighting, wiring, painting, wall construction, signage, and miscellaneous repairs and renovations? Even used office furniture and fixtures can easily exceed $5,000. And, don’t leave out the cost of legal fees, insurance, licenses and permits, marketing, telephone and Internet, security and transportation. These are just some of the typical startup costs that you will need to consider.
Make two lists: one list for one-time startup costs and another for reoccurring costs. Before you go into business, plan to have enough cash available to cover at least 3-6 months worth of reoccurring costs, plus the one-time startup costs, and an emergency fund solely for your business. If you’re already in business and you can’t come up with $800 to $1,500 in 24 hours, you are teetering on the plank of disaster.