Intro to Financing Part 1

A well-written business plan will do two things. It will define your capital requirements, and it will reveal a project timeline to recover the investment and reach a point of profitability. If you need to borrow money, the business plan will be the focal point of the lender or investor – and the soundness of the plan will determine their interest in the plan. Do your homework.

A lender’s job is to rip your plan apart. “You forgot to include costs for A, B, and C…” “Why do you include costs for X, Y, and Z?” “You can’t hire that kind of help for that money.” Lenders work with rule-of-thumb numbers. Their job is to understand what things cost and to give your business plan a reality check. They have a rough idea of what it costs to make space habitable using a fixed cost and a 100-square-foot cost. They also understand hiring, employee, advertising, and promotional costs. These are people who have “been there and done that.” They’re going to look at all of your numbers and will subject them to a reality check. The more research you do for your plan, the more comprehensive you make it, so it realistically addresses revenues and expenses, the more likely you are to find a financial partner. There are few things more satisfying than to respond to an investor’s inquiries with solid documentation and letters of commitment or understanding.

Also in demonstrating your mastery of your finances – it is unwise correct a lender or an investor in such a way you make them seem or look wrong. Always agree with their insight and explain to them yours and specifically how you arrived at your conclusion.

If you’re going to a conventional lending source, chances are you will have to mortgage your house, and they will have little interest in your business plan. What they want is to be fully secured by your equity. If you’re looking for a real financial partner, you’re going to have to look at some unconventional sources of funding. These investors are going to be very interested in your plan, you background, and your business history when they consider a commercial opportunity.

Most unconventional lenders have a limited area of expertise; so don’t be upset if you get turned down. Every time you present your plan you’re going to get some insight into the perceived strengths and weaknesses of it. You don’t necessarily have to try and incorporate all of the suggestions you get from investors into your plan – but if the suggestions make sense to you, or you’ve heard them a couple of times, you should consider recasting your plan. In reality, a lot of these investors have a preconceived notion, right or wrong, of what works and does not work. Many professional investors, who either didn’t understand or didn’t agree with the vision, turned down Bill Gates. Don’t let it get you down.

You need to have and use the correct resources to make the journey and establish your location(s). If you anticipate that you’ll have plenty of customers in 11 months, and thus only require funds for 11 months – you risk the vagaries of an uncertain market and running out of funds too early. Fund for 24 months, and you risk having a bustling location and too many partners you did not need. By studying the past, you can come to many conclusions about the future that assist with narrowing your projected needs. You cannot come to conclusions about what has not yet happened – you can only have a framework within which you can measure your experiences.

Banking

You must keep all of your business transactions separate from your personal finances. All of your personal money put into the business should be in the form of a loan that is fully documented, pays you interest, includes terms for default and has a date specific for repayment. This will require separate bank accounts. Assuming you’re going to have a payroll, you should set up a separate account strictly for payroll. When choosing a bank, make sure that you select a bank that can offer you all of the merchant services you’re going to require. If you can solve all of your banking issues with a single bank, life will be a lot easier.

We assume you’re familiar with how checking accounts work, but you may not be as familiar with how credit/debit cards work or even ACH payments. In order to offer services in the modern world, there’s simply no way that you can succeed without accepting cards for payment. Accepting cards also allows you to automatically charge periodic dues if you have a membership contract on file, so you will need to check on software features available to you when selecting a provider.

To accept credit cards, you need two things, a merchant account, and a service provider. Your bank can create the merchant account (or you can use some great services like Stripe, cube, PayPal, etc.), and will either be your service provider or direct you to independent service providers that work with your bank. The fees for setting up an account shouldn’t exceed $200 to $300, not including any point-of-sale (POS) equipment. The POS equipment, the card swipe equipment, can either be purchased or leased on a monthly basis. Today one can even use a smart phone or tablet. We used to recommend a purchase, as there is equipment on the market beginning at around $100. You can buy POS software for a PC for well under $100, and simply add a keyboard with a swipe function. Today, with the software and sophistication we recommend the use of dedicated tablets.

Your cost for settling transactions will have two components, a fixed fee for every transaction and a percentage fee. A reasonable range for the fixed transaction fee is 18 to 25 cents and 2% to 3% for the percentage fee. For example, if your fees are 20 cents plus 2.5%, on a $10 charge you would pay 0.20 + 0.25 = 45 cents, and on a $100 charge you would pay 0.20 + 2.50 = $2.70.

When a charge is completed, the service provider will transfer the funds to your merchant account. How timely the funds are transferred will depend on the provider, a few will transfer funds in real time, others overnight, and some will take two to five days.

L7 – Some business can be financed by cash flow and some cannot. What you must always be cognizant of is positive cash flow. It does not matter how profitable you are on paper if you cannot pay your rent or employees.

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