What a great piece of advise. “Check Yo Self Before You Wreck Yo Self”. Rapper turned actor Ice Cube popularized the phrase with his 1993 single “Check Yo Self”. Back then, as a twenty something, we used the phrase humorously when someone we knew, was about to go off and do or say something that seemed wrong or had the capacity of ending badly.
Every parent tells their kids to “be careful” as they go out the door. I’m not a fan of rap music, but in my opinion, this may be viewed as one of rap musics shinier moments. Besides making gobs and gobs of “Cheddar” or “Benjamins” on selling self-expression or life experience lyrics, laid over a track of head bobbing music, coupled with an over abundance of trunk vibrating bass thumps, it simply means “you better know what you’re doing “.
As mentioned in an earlier blog post, I’ve naively spent money on an idea or two, without really understanding what I was doing and subsequently saw my money fly away like a “homing pigeon”, expecting it to come back with friends, but instead disappeared like a Twitter post that was sent, but never showed up on my timeline, leaving me to wonder what happened?
I believe going into a start-up business without completing an exhaustive analysis of the day-to-day operations, expenses and costs of your business goals and know how, can create the high likely hood of the “wreck yourself” or losing your hard-earned investment of money and time or worse, your home.
Understand why a lender wants you to provide a business plan with a loan application. The operational aspect of your business, your experience are important, but they are secondary to the financials of the business and credit rating of the borrower(s). If you your credit ratings are in the high 700’s to 800+, the lender can usually move your loan application further along, asking about cash on hand, collateral assets.
For us, this was the first time we were asking for a loan to fund part of our dessert truck business. As a first time business owner, with less than 1 year experience in the field, our loan package was looked at with a fine toothed comb. Do you have 30% down? 30% is a big number. Why 30%? Well. if you look at us from a “risk” perspective, we don’t look that good. We have good credit, it helped to show our commitment to this business venture with a Le Cordon Bleu course completion. Still, most lenders don’t want to lend money to anyone new to the food or restaurant sector, considering the high rate of failure in the years 1 thru 5.
That 30% I mentioned, is of your Total Project Costs. So for example if you, through in-depth analysis, research and completion of a business plan, determine that your Total Project Cost is $100,000, you will need to come in with 30% or $30,000, before the lender will let you borrow the balance of $70,000. Our lender only allowed us to add or build 3 months of cash reserves for “fixed” costs into the loan, so any extra cash reserves after 3 months, will have to come from some other source. Our original loan request had 6-7 months of cash reserves built-in to the loan application. The lender quickly explained that wasn’t going to be considered, so we had to bring down our loan request to fit their parameters before going any further. All they can say is no. I like to over insure sometimes, just in case.
There are many ways to fund your new business. Our path to business ownership is the traditional method of Cash, Credit and Collateral. Put a percentage as a down payment, show a history of making good of all your past financial commitments, get a loan for the remainder of your project and give the lender the right to get their money back by taking and selling your home or any assets you provided as collateral, in the event you fail to make the agreed upon payments to repay the loan.
I’ve read up a little on the many techniques to launch a business, from: Crowd Funding, Credit Cards, attract Angel Investors, Micro-loans, borrowing from family and friends, tap into a retirement account, home equity. All of these methods, plus others can help an entrepreneur get over the most challenging obstacle to business ownership.