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    13 Replies Latest reply on Nov 11, 2012 9:47 AM by Moderator Ilona

    Financing for Start-ups

    raffertys Adventurer

      My wife and I have wanted to start our own business for years.  After a lot of discussion we decided that the best fit for us would be to open a Tobacco and Smoking Accessory retail shop, so I did a lot of research and spent well over 100 hours drafting a business plan.  I made an appointment with our local Small Business Development Center to discuss my business plan.  The appointment was 2 days ago and what I thought was going to be a meeting reviewing and refining my business plan turned out to be an hour long session of the counselor telling us how difficult it is to get financed for a start-up.  The whole meeting had a very negative tone to it and if I took her information at face value, I would give up now.  I am sure she was trying to just be the "reality check" that every entrepreneur needs and I refuse to give up on this dream until I have exhausted every option available to us to get started.  She did take a copy of my plan and told me she would review it when she had the time to dedicate to it and get back to me with recommended changes but did not give me any indication of how long that might take.

       

      The numbers I have crunched show that we need $120,000 to get up and running and cover 6 months worth of operating costs.  My wife and I have $25,000 to contribute, but no other real property or assets to use as collateral.  I haven't run our credit reports in almost a year so I know I will need to do that soon, but the most recent ones I have we both have credit scores below 600.  Over $66,000 of that initial costs will be direct purchases of retail assets (display cases, POS Systems, walk-in humidor, inventory, etc) and I am not sure if that would qualify as worthy collateral to a traditional lender.

       

      I believe my business plan shows a very strong case for sustained success and profitability, and combined my wife and I have over 20 years worth of retail experience, and I have 10 years of active duty military service for management experience.

       

      My questions are;

       

      What is the actual reality of securing financing for start-ups?  In my mind $95,000 is not that much money in the grand scheme of things, but I also understand that it is a very large risk without collateral.

      How much weight is placed on the strength of the business plan versus credit history?

      How difficult is it to find and "sell a business idea" to angel investors if traditional financing falls through?

      How many angel investors are happy with debt-equity only versus those who want owner-equity in the businesses they invest in?

        • Re: Financing for Start-ups
          Moderator Ilona Ranger

          Hi raffertys, looks like you have your plans well thought out, and I am glad you are not giving up just because the meeting you had, had a negative undertone. I am sure we have someone amongst our many knowledgeable posters who can give you an answer to you financial questions. We might even have someone that you could communicate with about your business plan that would give you more positive feedback and help. Please keep us up to date on how everything is turning out for you, your wife and your business adventure.

           

          Ilona

           

          1 of 1 people found this helpful
          • Re: Financing for Start-ups
            Stephen Hartfield, CPA Adventurer

            Hello Raffertys,

             

             

            Before I get to the financing aspects of your business, I would like to address your business purpose. If this is your dream and you have done your due diligence via your business plan, you understand your marketplace (your retail experience s/b the barometer), there is profitability inherent in your plan, and you are willing to forego lots of sleep, then no matter what anyone says, from bankers to accountants, you should not be dissuaded. Rejection and entrepreneurship go hand-in-hand. If it were easy, then you wouldn't have this opportunity in your area.

             

             

            Now on to the financing. Today, so many people have walked away from their homes and/or businesses - no reflection on you - that banks, investors, partners all want to know that their investment is securitized backwards and forwards. Add to that mix, an untested business and you have a very slim chance of getting conventional financing.

             

             

            So what can you do? Well, you will have to get creative. First, try to get your furniture and fixture financed through a leasing company (this will be slighly more expensive). If that fails, then consider Micro-Loans (costlier, still). Another alternative is a partner(s) (probably the costliest of all choices ;-) ). Another, albeit dangerous option, is credit cards. My best advice with this is to continue to read and talk to everyone possible about your passion.

             

             

            Once you are up and running, vendor credit may be able to help you limp along.

             

             

            To answer your other questions, the business plan is just a piece of paper, one that is subject to interpretation, manipulation, and the caprices of the economy and half a dozen other factors. So don't be surprised, or worse yet, hurt, that what you put 100 hours into producing does not make their radar.

             

             

            Angel investors tend to be looking for the next big thing. Brick and mortar stores in suburban shopping centers just don't have enough cachet for them.

             

             

            The information above is for general information and is not intended as accounting, tax, or legal advice.

             

             

            Best of luck,

             

             

            Stephen R. Hartfield, CPA

            www.debitsandcredits.com

             

            1 of 1 people found this helpful
              • Re: Financing for Start-ups
                raffertys Adventurer

                Hello Stephen,

                 

                Thank you for your very helpful response.  I know I am in for an uphill battle to get up and running, and I am very up to the challenge.  If starting your own business were easy, everyone would do it.

                 

                Thank you for the reality check on the current funding climate.  I'll still try every avenue available for traditional financing, but will not count on success.  Hope for the best, plan for the worst as they say.

                 

                I will look into leasing companies for the fixtures, I hadn't thought of that so thanks for the idea.  We would like to do this without having to take on a partner because this will be our sole source of income and we have 4 children to support, so losing a percentage of the profits to a silent partner would probably have us closing our doors pretty quickly, but I will not totally discredit that idea and keep it on the back burner as a last resort.

                 

                After doing some more research on angel investors I did realize that the likelihood of that being an option are probably very limited because as you said they are looking for the next big thing.

                 

                I will definitely keep these boards updated on my progress and hopefully I will have a success story coming in the future.

                 

                Raffertys

              • Re: Financing for Start-ups
                Jim Peters Tracker

                I would suggest you visit a certified financial planner in your area and follow his recommendations for a better solution to your problem. As far as my view is concerned I would say you can go for accounts receivable financing, it is fast increasing in demand by businesses all over the world.

                  • Re: Financing for Start-ups
                    Moderator Cath Guide

                    Stephen and Jim, thank you for your sound advice.  So often people have a dream and before proper planning, they jump into a business and become quickly discouraged.  Your suggestions will be helpful to many.  I hope raffertys will find a lot of points to ponder in your comments.

                     

                    We welcome others to offer suggestions/advice on financing for start-ups, too.  We all learn from one another.

                     

                    Cath

                    • Re: Financing for Start-ups
                      raffertys Adventurer

                      Jim thanks for the advice.  I hadn't thought of contacting a financial planner and after doing a search there are a few firms in my area so I will definitely contact them and see what they suggest.

                       

                      I had never heard the term accounts receivable financing before you suggested it and after reading a little about it, I will take that under advisement as well.  From what I can tell it's based off of a line of credit through a traditional lender rather than an outright loan and is backed by your potential retail sales receipts.  Is that correct?

                        • Re: Financing for Start-ups
                          Stephen Hartfield, CPA Adventurer

                          Hi Raffertys,

                           

                          Unfortunately, accounts receivable financing will not work in your case. You are a Point of Sale business where you sell your inventory for cash.

                           

                          Traditional A/R Financing works in an organization that extends credit to its customers and then has the bank or asset based lender advance a percentage of each sale.

                           

                          This works well in manufacturing companies or other businesses that extend credit to their customers.

                           

                          For the benefit of all of the community, Asset Based Lending is great way to finance your accounts receivable. The process is pretty straight-forward. Each month, or more frequently, you prepare an accounting known as a Borrowing Base Certificate (BBC). The BBC is then used to determine the maximum amount of borrowing for that particular time. As your customers pay their invoices, the checks are mailed directly into a special, bank lock box. All payments go to reduce your loan balance. Your customers continue to make the checks payable to you, they just mail them to a separate lock box.

                           

                          Stephen R. Hartfield, CPA

                          www.debitsandcredits.com

                      • Re: Financing for Start-ups
                        AMULETAnalytics Adventurer

                        One new option in start-up financing is to run a crowdfunding campaign. Crowdfunding provides a way to raise funding without giving up equity or getting into debt. The money comes in the form of a large number of small "micro pledges" in return for simple rewards. A reward could simply be a pre-sale product that you offer at a price below list. At the end of the campaign, you collect the funds, fulfill the rewards, and you're off to the races. In your case, you could offer purchase discount coupons as rewards. One good crowdfunding site to consider is: www.fundageek.com

                          • Re: Financing for Start-ups
                            raffertys Adventurer

                            Thanks for the idea Amulet.  I have already looked into kickstarter.com and peerbackers.com so I'll look into fundageek as well.  We are considering that as an option to maybe get some of our start-up costs, but I don't think that would be a viable option for gathering the majority of it.  From my research most of those projects are trying to get funding for "the next big thing" and I am not sure how much support a brick and mortar retail shop would get.  You idea about offering discount coupons might help though, although they would only be viable for local pledges.  It's definitely something to consider.  Thanks!

                          • Re: Financing for Start-ups
                            raffertys Adventurer

                            Well I got some pretty depressing information yesterday.  I sign went up in a store about 100 yards from my proposed location announcing "Smoke Shop Coming Soon".   So now I'm back to square one trying to find a new location and rewriting the financial assumptions.  I'll be honest, it broke my heart just a little...

                              • Re: Financing for Start-ups
                                Stephen Hartfield, CPA Adventurer

                                Hi Raffertys,

                                 

                                Maybe this is a sign!

                                 

                                Maybe it is time to improvise. Have you considered taking your limited capital and starting a cloud based specialty smoke store or club? (This might have the cachet that an investor would like.)

                                 

                                Here is what I mean:

                                Specialization and customization (spelled DIFFERENTIATION) are more in vogue today than ever before. Let's say that you target cigar smokers most of whom don't know a good smoke from a great smoke (yes, I fall into that category). Each month you send a club member or other customer 5 cigars. If they vote on your website for their flavorite (pun intended) cigar, then on their next order they get one cigar for free. What distinguishes your cigars from the bargain sites? It's the education and interaction you provide - each batch you send has an explanation of the cigar's attributes. For example: Canary Island paper with Honduran tobacco, smooth and less biting, etc.. You are creating a personalized experience for your customer. On your website each cigar, pipe, cigarette can have comments, etc. You are only limited by your imagination.

                                 

                                Stephen R. Hartfield, CPA

                                www.debitsandcredits.com

                                  • Re: Financing for Start-ups
                                    raffertys Adventurer

                                    Stephen,

                                     

                                    That is an interesting concept I must admit.  I had a friend while I was in the Navy that was a beginning cigar connoisseur and he belonged to a club that sounded somewhat similar to that.  I will definitely have to do some research and see what is already out there along those lines.  I do not know the 1st thing about operating an online business so that part is unknown, and this will be our sole source of income once we open and that sounds a little risky.  It is something to think about though and see how I could tweak it and make it more profitable.  Thanks again!

                                • Re: Financing for Start-ups
                                  bj.nje.4life Wayfarer

                                  Entrepreneurs Tips

                                   

                                  Hi,

                                   

                                  I think that it is a great thing to own your own business and be in control of your own finances. However, there are few things that an entrepreneur needs to know that could be very helpful in helping them obtain the financing they need. I suggest you check some of the advices provided by Jonathan Nzali in his blog. The link is above.

                                   

                                   

                                  Best of luck...

                                  • Re: Financing for Start-ups
                                    Moderator Ilona Ranger

                                    Great points and tips everyone, thank you all for sharing, please keep the tips coming.

                                     

                                    Ilona