I have been developing this business plan for a couple months, i have done a lot of very detailed research on my business endeavor. I have began looking for suitable locations in other cities (the town i currently reside in could never support what i want to do)
My question is one for bankers, or those that have a lot of investment experience. I am 19, about to graduate college, have almost no credit, $30K in the bank, plus a $20K car for collateral.
I am asking for about $200K in start-up costs. I plan on leasing a building in the twin cities, which is about 40 miles from where i live.
Should i go to my local bank and apply for the start-up loan, or to a bank in the city where i plan to set-up shop?
How much of a chance do i have of getting this loan considering everything i have told you guys?
I may have forgotten some factors, if you need more info please ask. Thanks!
First off, you may want to consider looking into government programs for small businesses. Bankers may know of them too, but it’s probably wise to do your homework first
Now, on to your question:
pretend you’re a banker. if you were a banker, would you give a kid 200k willy-nilly? no, you’d want to ask:
*what is his business idea. claiming you’ve got a great invention versus running a dollar store entail significantly different notions of risk for the banker. If it’s a high-risk venture (i.e. innovation-driven) then you would be better off looking for private equity financing (where the higher risk is assuaged by the potentially huge upside equity position they take)
*how likely is it that i’m going to get repaid. frankly, you don’t have enough assets to post as collateral for the loan if the banker makes a rational bet that your potential for success is anything less than 75%. start-up business success rate is typically way lower than that. you need to show the banker why your business is going to succeed - doing mere research isn’t enough. you need to demonstrate to him, to convince him, why YOU yourself can make this thing work or not.
*what are you going to spend the money on. I’d suggest that if you’re going to use a good chunk of your start up capital to lease an asset, that makes the decision to loan you money harder, because there’s no assets that the bank can take from you in the event of default. If you used that $200k to hire a person to do something, the bank has NO recourse whatsoever to recover its money (other than from you). if you used that $200k to buy stuff, then at least they can take that stuff to cover some of their losses.
as for where to get the loan, well on one hand you may have a better relationship with the banker in your hometown, but then again it’s alot harder for him to keep tabs on your business. that’s a judgment call for you.
What type of business are you thinking of? If you can get a few years experience in the field, it will give bankers confidence that you know what you’re doing.
-What am i spending the money on?
My plan is to pay the first months lease and utilities from my savings. The 200K is going to be used primarily for purchasing goods, registers, signs, advertisement, and keep at least a couple months worth of lease on the side for a cushion to fall back on.
So most of that 200K is going to be material, which the bank can repossess if i happen to fail.
My location i have chosen is in a very high traffic location, right next to a mall that (according to the malls website) attracts 10 million customers a year. Taking that number i did the math, and if i can get 1% of those 10 million to walk through the door and have a majority of that 1% purchase $4 worth of goods, that should be about the break even point for my business.
The business i would like to open is somewhat of a hybrid between Half-Price Books and Cheap-O records. New and used books, CDs, DVDs, records, magazines, and video games.
I have worked in retail before, so i have a fair amount of experience.
I don’t want to mislead you into thinking that if you spend all of the loan funds on material objects they significantly reduce their risk. They don’t. A cash register purchased for $200 is probably worth $20 to a bank in terms of collateral
I understand. Yeah thinking this through from that standpoint, this wouldn’t be a very wise investment for a bank. It is going to take a lot of used books and CDs to be worth $200K to a bank.
I guess i just need to work on my numbers a little more.
If you haven’t already done, start by writing a detailed business plan. Also, I recommend that you talk to owners of existing used record and book stores to find out what sort of revenues and problems to expect.
I can tell already that your business plan isn’t very good. And I mean this in the nicest way possible, as an accountant who works with small businesses and is currently helping several would-be start ups get things ready for their bankruptcies.
If you have a reserve of only a couple of months worth of operating expenses, you are guaranteed to fail. You should expect to have at least 6 months on hand; say, $50,000. You could ask for a $300k line of credit. Use $200k to get going and have $100k for a reserve.
This is NOT how you estimate income. Even if it was, you haven’t really done the math. 1% of 10 million per year is 100,000 per year. 1% of 100,000 is 1,000 per year. So you believe you can break even with sales of $4,000 per year?
Maye you meant month, but how is $4,000 per month a break-even? Most retail markups are 50% or so, so $4,000 in sales is $2,000 in income. A single $10/hr employee is going to cost close to $2,000 per month (once you figure in taxes and workman’s comp). Payments on your $200k loan will be $2,000 per month (interest alone will be more than $1,000).
You really need to talk to people who have retail locations because your business plan is showing that you have no experience. If I were advising you for the greater Seattle market, I’d say you need - at an absolute bare-bones minimum - $4,000 a month for the lease, $5,000 a month for wages, and $3,000 a month for advertising, utilities, etc. You also need to talk with business owners or advisers in the industry about how to do a real estimate of income. Most retailers talk about sales per square foot and inventory turnover. None of them are basing their numbers on a percent of a percent of people who are at the mall (especially when you are not in the mall).
Banks want to repossess assets, not material. Vehicles, buildings, land, machinery and the like. Inventory is worthless to them, especially used inventory. Used inventory is a liability - if you can’t sell it, someone has to haul it to the dump.
No, he thinks that if 1% of the mall customers visit his store and the majority of that 1% spend four bucks each, he’s made enough revenues. I think that’s optimistic. And as someone who goes to the mall occasionally, I usually just drive past the strip mall next door without even stopping.
Ah… I see how I was reading it wrong. And, yes, it’s very optimistic. If you’re not in the mall, you might as well be on the moon for mall shoppers.
Two of my retail clients have near-mall locations. The first did $180,000 in gross sales per year, financed by a $250,000 loan. They closed up after eight months because they didn’t have any extra money on hand to cover operating costs. The second does about $240,000 and financed with $210,000 initially and added $50,000 of their own money to keep it going. After two years of losses, they’re now at break-even.
Say that you’re open every day. 100,000/365 = 274. Have you ever in your life seen 274 people walk into a used CD/book store in a day in a strip mall? I doubt that most places like that get that many people in a week.
Any business plan should indicate that you’ve checked out people who are currently in your business. Have you talked to anyone who runs a Half-Price Book Store? Asked how many people they get in a day? Asked how much the average sale is? Asked how much inventory they carry? Asked how many people they need to employ? What their taxes are? How they deal with accounting? What waste management costs? What leasing agreements cost in your area? Why they are located where they are, which is normally not anywhere near the pricy sections near megamalls?
You say you’ve worked in retail but nothing you say indicates you understand what it takes to run a store, which is very different from working in one. Any banker will want to be assured that you’ve thought about these issues.
Right now your numbers are hallucinatory and your business plan doesn’t cover any actual business, which is the day-to-day operations. And you’ve listed nothing that a bank can recover money from if you fail.
“purchasing goods” - worthless, maybe a penny on the dollar
“registers” - maybe 10 cents on a dollar
“signs” - zero
“advertisement” - zero
“and keep at least a couple months worth of lease on the side for a cushion to fall back on” - zero
You’re essentially asking the bank to give you money with no collateral. That’s strike three.
That may be in other sections of the country, however in the twin cities used book and CD stores seem to be very popular.
I frequent a half-price books in Maplewood, and another in Roseville…whenever i go in there, whether it be noon on a Tuesday or 6pm on a Saturday, there are always at least a dozen other shoppers in there, and several more coming in and going out.
Sorry, i’m in the reply screen so i can’t see who said this. But when they were talking about my math on the 1%, they said this is not the correct way to approach this to the banker. What is the best way? They must be interested in traffic and numbers.
This may not help , but If I were you I would look at buying a house in a blended zone , if they exist. Im not even sure if you have that option , here in Ontario , land is zoned for residential, retail/commerical and industrial and probably a bunch more type zones.
We do have in some locations , whats called blended zones where people have converted houses, usually the older houses into retail or commercial locations, you may have noticed this in lawyers offices, dental offices and the like.
I have seen about three businesses like the one you propose, operating out of such locations. Heck , the bank may even point you to such a house , given the amount of repos.
What you want to do is find out how much other retailers in the area and industry sell, as a ratio of either sales/square feet or sales/inventory value. The sqft method is more common in my experience and it will tell the bank all they need to know about the traffic. Here’s a hypothetical of what your business plan would say:
“The desired storefront is located in the high-traffic Twin Cities MegaMall neighborhood, which attracts 10 million unique customers annually. National averages show that jewelry stores expect about $700/sqft in annual sales; clothing, $300/sqft; stores like mine, $100/sqft. I have surveyed local merchants, including Fred’s jewelry at 3915 Main St. (across the street from my location) and Suzie’s Clothes are 3800 Main St. (a block south from my location). Fred reports sales of $1,200 per sqft and Susie reports $600/sqft due to the high traffic in this area. My potential landlord and the Twin Cities Chamber of Commerce have provided documentation (Attachment x) support estimates of 50-75% higher sales per sqft in this area. As a result, I feel confident that $150-200/sqft is achievable at my location. Based on a 3,000 sqft sales space, I anticipate annual gross revenues of $450,000 by the end of my second year, as shown in the attached financial projections.”
(Will neighboring businesses share statistics with you? You’d be surprised how helpful other small business owners can be if you are polite and professional. Join the chamber of commerce or other networking groups.)
(The last two are more general industry financial comparisons. I consider something like that essential for any business plan, especially if you don’t have enough previous business experience to make your own authoritative assertions. It’s well worth the $100 or so for a report.)
Here’s what I’d do- find another used book store in the city that’s doing well. Tell them you have a location and $40000, and would like to open another branch location. Used book stores often have a huge amount of excess inventory, and they could help you a lot. OTOH, this would mean they are your partners.
Your idea sounds like a tough market to crack. The twin cities already has the established Half-Priced Books and while I do see a fair amount of people in there they certainly aren’t buying in droves. Most like to spend time in there browsing and reading. They only have 1 or 2 registers and there never seems to be any line at them.
There’s also the well established GameStop with dozens of locations as well as GameCrazy in all of the Hollywood Video locations. They pretty much have the market saturated.
Used DVDs is a dead market as both Hollywood Video and Blockbuster have a tough time selling their previously viewed stock while older titles can even be bought new at Target and Wal-Mart for $5-$10.
Used CDs are also a dead market since everyone is going MP3. Even new cd sales are way down. There’s a CD Warehouse near me that must be a front for drug sales since I never see anyone in that place. Even the larger ElCheapo locations are struggling.