The Money Mancomments (7) November 2nd, 2008
Our meeting with the small business banker left my head spinning and my confidence shattered. Anna and Jamison were homeowners and used to talking to bank people about loans and mortgages and interest and such, but I lived in an apartment and did not speak “money” (though I sure knew how to spend it!). I probably should have read an “Introduction to Small Business Banking” before our meeting, but I didn’t, so I was relying on my business partners to ask the important questions…
Phil, our banker, told us that the first things we needed to do were:
- Create a partnership agreement
- Get an EIN number
- Check to see that the name we wanted to use for our store was available
- Register our business with the state of Nebraska
Next, Phil said we needed to determine our “break-even point” or the point at which our store would start to generate a profit. To anyone who has ever taken a basic level management class (and I would now recommend that any potential business owner take a basic level management class), this would have made complete sense to you. But in our meeting with Phil, I sat there completely intimidated, scribbling down everything he was saying as quickly as my pen would let me.
To come up with our “break-even point,” we needed to consider our fixed costs (rent, utilities, paying employees, paying ourselves) and our start-up costs (working capital, inventory to open, marketing, store renovations). I could see hours and hours of research ahead of us.
When it came time to talk about applying for a small business loan, Phil surprised me by saying that his bank was only interested in a 1- to 1-1/2-page business plan. I had heard that business plans were supposed to be long and complex, so this bit of news came as a relief to me. The business plan that he wanted needed to include:
- The name of our store
- The location of our store
- A description of what our store will sell
- Our resumes
- A summary of how we will manage the store
- Our financial projections over two years on a month-to-month basis
Coming up with our financial projections seemed like it would be the most difficult part of writing the business plan. How do you anticipate how much things are going to cost—and how much money you are going to make?
Finally, Phil started talking about the types of loans available to us and used a word that scared Anna and Jamison—collateral. Collateral is an item that is pledged to guarantee the repayment of a loan, such as property. Since they were both homeowners, the bank would want to use their houses as collateral. As I was still an apartment-dweller, I had nothing to put up as collateral. Needless to say, that didn’t sit well with Anna and Jamison…
As a small business, we would be entitled to an SBA guarantee, which, as Phil explained poorly, meant that the U.S. Small Business Administration would guarantee 75% to 80% of the loan. To be honest, I was confused as to the role of the SBA with regard to our loan. Based on our rough estimate that we’d need a $50,000 loan, Phil said we were looking at 7.5% interest on a seven-year loan with a 20% down payment.
When I talked to my father after the meeting, he thought 7.5% interest seemed high and recommended we meet with another bank to see what it could offer. He also suggested that once Anna, Jamison, and I created our partnership agreement (since Anna was a lawyer, she’d probably write it), I get my own lawyer to look it over.
I never felt as incompetent as I did after our meeting with the small business banker. At Boston University, I graduated from the communications school, COM, or the “College of Optional Math.” Rather than feeling excited about the progress we were making, I was beginning to think that Anna, Jamison, and I were in over our heads. I wanted to do something with no math involved, so I decided we should focus on naming our business.