The following information is intended to make you aware of some of the pitfalls of going into business so you can make a balanced, informed decision.
Louisiana Small
Business Development Center
Very few start-up businesses have the expertise to write a three-year business plan that is both practical and followed.When you start your business, your banker, your accountant and everybody you talk to will expect you to have a business plan that shows you are aware of what is necessary to start your business. The reality is that a three-business plan is useless; planning is essential for success.
Colin Powell once remarked, "No Battle Plan Ever Survived The First Encounter With the Enemy." When you create a business plan, it has to be a “living document” that can be adjusted as circumstances in the economy dictate, and your business experience accumulates.
Tim Berry is the founder and president of Palo Alto Software, the manufacturer of Business Plan Pro, one of our country’s bestselling business plan software. Much of his advice for creating a business plan is simple and makes sense. He’s also the author of The Plan-As-You-Go Business Plan, which is an excellent tool for anyone who has to write a Business Plan.
The Internet is full of business plan templates that you can purchase. However, before doing so, you may want to check out the following links:
Depending on your business type and situation, you will need to decide which legal structure best fits
your business. SBA site lists all type of business structures, and has gives the advantages and
disadvantages of each type.
Be sure to visit the links provided to learn all the specifics of each business structure:
The various structures are:
• Sole Proprietorship
You are responsible for all company liabilities.
1 owner, you can operate with your Social Security Number as your tax ID #
• Partnership
Partners are responsible for all company liabilities.
2 or more owners, you have to obtain a federal tax id number
• Corporation
The shareholders are not responsible for corporate liabilities.
1. C-Corp: Corporation pays taxes, and is taxed again on dividends
paid to shareholders
2. S-Corp: Corporation pays no taxes. The profit or loss of the corporation goes directly to the owner(s) tax return, split up by % of
ownership.
• Limited Liability Company
New business structure that is hybrid, designed to provide limited liability feature of a
corporation and the taxing flexibility of partnership.
Depending on what type of business you have, you will be required to obtain permits and licenses from local, state and federal agencies. Here you will find links for some of the permits and licenses you will need to obtain:
Risk Management
Insurance is about managing your risk, but also about how much can you afford to spend to protect yourself from loss. When you first start out, you have less property to protect. However, as your business grows, your insurance program needs to be flexible to keep up with any changes.
You should not buy insurance on the phone or
online. Your agent must understand your business in order to help you get the
proper coverage at a price that your business can afford. The cheapest policy can be the most costly if
it does not properly protect your business from loss. You need an agent that will annually review your
coverage with you, and adjust it to fit your changing situation. This a long-term relationship. Safety
training, policy and procedure manuals, regular training and reviews are part of your risk management
program, and some carriers offer discounts for these items.
There are two different types of agencies: Captive Agencies that represent one line or lines approved by that company ( State Farm, Farm Bureau, Allstate, etc) and Independent Agents, who represent many different lines of insurance.
You must be honest with your agent when taking out
coverage. If you are not, this could lead to claims being denied in the future.
Small Business Liability Insurance
The number one factor in obtaining any kind of credit facility is the ability to show the capacity of
your business to repay. If you can’t show the ability to repay, you will not obtain financing. With the
exception of cash collateral, collateral will not help without the capacity to repay. Banks are not in
the business of liquidating collateral. Collateral is always secondary to the ability to repay. If you
cannot produce financial statements (usually three years worth) or well thought out and defensible
projections for new and young businesses, then you are fighting an uphill battle. Remember, that banks
are lending depositor money and have a fiduciary responsibility to their account holders to lend wisely.
They are in the business of risk management. The statement “I know I can repay it!” is not convincing to
a lender.
Once you have your plan to present to a lender, make sure you choose the right type of lender. Most small business are used to dealing with the branch manager where they make their deposits. If your request is relatively small one (up to $50,000.00), the branch manager may be able to help you. Larger loans will require more expertise, and you want to ask for a small business lender. Whichever you pick, ALWAYS make an appointment to meet with them. Loan requests usually require a good bit of time and the lender needs to block out enough time to meet with you and allow you to make your case and for them to ask questions. Even though you may have your documents and business case ready, when making your appointment, let them know what kind of loan you are seeking, and then ask what documentation they would like you to bring. This can vary from bank to bank. It is always good to have what they require for the first meeting.
Remember, preparation and choosing the right lending officer is key. If you can’t support your loan request with the ability to repay and a sound business case, then the lender will not be inclined to view your request as a viable risk of depositor.
Revolving Lines of Credit (LOC) - LOCs are typically used to finance short-term credit needs like inventory purchases. These inventory purchases are then sold for a profit and the LOC is paid down on a short-term basis. They can also be used to fund short-term cash flow needs, like a payroll, where funds are in the process of being collected from sales, but not yet in the bank. A typical LOCs balance will go up and down throughout its life. Some lenders may require that the LOC be paid to zero at least once during its term. LOCs should not be used to purchase equipment, rolling stock, or other long-term assets. LOCs are usually underwritten for a short period of time, a year or less. They are then reviewed for renewal. LOCs can be secured by collateral or unsecured.
Term Loans: Term loans are used to purchase equipment, rolling stock, and other fixed assets. They are paid on a monthly basis, usually a fixed payment. Terms can range from 24 - 72 months, depending on the type of asset being purchased. Depending on your business, down payment requirements can range from 0 - 25%, and in some cases more.
Commercial land/building loans: Loans to purchase unimproved land (no structure) range in terms from 5 -10 years. This can vary from lender to lender. Payments are usually fixed from month to month. Down payment will typically range up to 30%. Commercial land and building loans are similar in structure to land only loans. Terms will typically range from 5 - 15 years, some times 20 years. Down payments can range up to 30%.
Construction loans: Construction loans are short-term loans used to finance the construction of a building. The money is given out in draws as the project progresses. The first draw can be used to purchase the land, if not already owned. Subsequent draws will typically require an inspection to make sure the money has been spent properly to keep the project on schedule. When the project is complete, the construction loan is paid out with a term loan as described above.
Interest rates, downpayments, and fees will vary from lender to lender. Interest rates are usually based
on the level of risk the bank perceives the borrower represents. Depending on the type of credit
facility granted, you may be offered a fixed rate or a variable rate. On some term loans, the rate may
be fixed for a length of time, say 5 years on a 15-year loan, then renegotiated for another period. Some
lenders may offer a fixed rate for the entire term. Downpayments will also vary from lender to lender,
as will potential loan fees. Remember, all interest rates, down payments, and fees can be negotiated.
Offering to place your deposit accounts, merchant services, credit cards, other loans, etc. can be used
as negotiating points.