Question for Business Owners

[notherbob]

You're absolutely right. I'm really glad you called me out on this. I used to be the complete opposite of this. Ever since being laid off a few years ago my attitude has been absolute crap and I took it way too personal. I've been trying to make the necessary changes but obviously I'm going to need to step it up because it's not enough.

I also might as well stop wasting my time and thinking so big and start thinking about securing a smaller loan and how to scale down my immediate effort into a start-up.

I appreciate the critique, thank you!

If you will forget about big and focus on efficient and profitable, size will take care of itself over time.

The three main reasons for start-up failures have been inadequate understanding of and experience in the field of endeavor, poor management decisions and under capitalization. The extent to which you can avoid them increases your chance for success.

It's hard to get a loan these days so you may have to wind up taking on one or more investors. It's hard to keep full control when you don't have a lot of your own money in it.

Good luck to you.

 

[CowboySwagger]

One key, and I cannot stress this enough, limit your under the table transactions. Lots of people make the mistake of claiming taxes on a small portion of their income. Let's say for ease of math you are making 10k per month, but claiming taxes on 1/4th of that. A bank loan is based entirely upon your taxable income.

So while you are making 120k per year, the bank can only look at 30k of that.

Once you are ready to buy your business license buy it as an LLC, then under that LLC establish an S-Corp. Pay yourself a salary from that S-Corp.

If you have a wife or kids living in your home and they answer the phone for your business pay them a salary out of that S-Corp.

There is a reason for that. First of all you need to create an investment or retirement fund. 401Ks are still the best known methods. Well, you can only put 17k per year into your 401k. But your employer 9the S-Corp) can match funds up to 100%. Thus you could effectively put 34k per year into that fund.

Roth IRAs are great as well.

Get a good accountant that you trust, and grow the business. Too many people do just enough to stay afloat. If you are living from paycheck to paycheck as a business owner then you aren't doing a good enough job.

The economy is hard right now. Bank loans are tight. Right now if you look small businesses are dying. Big box stores and chain businesses are the only ones thriving unless a place is so established or so superior in quality that loyal customers will never go away.

Good luck. PM me if you have specific questions that you don't want public. I will do my best to answer them for you.

Props to your chops on this great approach to a start up. This is very sound thinking. Just WOW!

I have other questions for the OP. How much realistically would you start up cost be? From that start up cost, in a conservative approach to sales, what amount would you have to sale for your break even point?

Of course this gets into your business model of course....but angel investors, and v.c.'s could be a viabable option, but if your idea is sensitive good luck on getting them to sign N.D.A. and/or N.C.A.

Banks want collateral to minimize their exposure. Do you have anything to collateralize that would interest the banks?

Big banks are tight, but their are credit unions and smaller banks opening up, that are trying to penetrate the maket......and they have inventory, lots of it and these credit unions are lending money like crazy because they want to get their inventory in the hands of good borrowers.

If you had wealthy friends wanting to invest workout contracts as to selling of a portion off, or using them as angel investor where they get 3 to 5 times their money in 5 years.

 

[a_minimalist]

If you will forget about big and focus on efficient and profitable, size will take care of itself over time.

You're right. I've been taking the wrong approach.

 

[Hostile]

This is something I am doing right now. I've had a credit card since I was 16. I've had a pretty good credit score but recently I have accumulated too much debt and I won't even think about going to get a loan until that's completely gone. My father has been talking to me about this since I was a kid.

You give really great advice, I really can't thank you enough.

It is my honor to help anyone. I don't know everything, but I know enough to give you a little here or there.

Yes, on the Roth IRA question you asked.

Here's one more tip for you down the road if you get big. You can get a tax break for hiring an ex convict. It is a really good tax break too. Choose wisely, but if you get a good man (or woman) they will work harder for you than almost anyone else on your crew, and the tax break is really amazing. I have never regretted the guys I have hired who needed a chance.

 

[MichaelWinicki]

Some terrific advice here.

Hos, WG, xwalker.

But I'll tell ya, notherbob's ought to be applauded...


"If you will forget about big and focus on efficient and profitable, size will take care of itself over time."

That's shear gold.

The ONLY way I would consider taking on a loan would be for a franchise, which would give you the tools on how to succeed.

But other than that?

No freaking way. Not unless you had started numerous businesses over the years, even if most of them were failures. Failing at a business can be more of an education than succeeding, but you sure as heck do not want to fail on the first one... One you've got a big loan tied too.

I'd either make the amount work that you already have or I'd focus on another business start that I could do with the amount I did have.

As far as a job goes, I'd suggest some sort of commission sales job like maybe an auto-dealership.

Learning how to sell may be the most valuable skill you could ever gain.

Priceless.

 

[67CowboysFan]

Since you will not be producing your own product to begin, contact the vendors that you will be getting your product or supplies from. Some will offer terms. As in interest free for 6-12 months.

Hostile gave good advice if you need to hire people. You can contact your local employment office too. I'm pretty sure there are tax incentives if you hire unemployed and welfare recipients too.

 

[a_minimalist]

I have other questions for the OP. How much realistically would you start up cost be? From that start up cost, in a conservative approach to sales, what amount would you have to sale for your break even point?

In terms of units?

Banks want collateral to minimize their exposure. Do you have anything to collateralize that would interest the banks?

Nope.

Big banks are tight, but their are credit unions and smaller banks opening up, that are trying to penetrate the maket......and they have inventory, lots of it and these credit unions are lending money like crazy because they want to get their inventory in the hands of good borrowers.

I'm going to look into this, thank you!

If you had wealthy friends wanting to invest workout contracts as to selling of a portion off, or using them as angel investor where they get 3 to 5 times their money in 5 years.

I have two I would trust and one has repeatedly expressed a personal interest and actually works for a VC firm which could be beneficial down the road. I just don't know if that would be a conflict of interest in the VC firms eyes. To be clear, he would invest his money I believe.

 

[Hostile]

BTW, unrelated but I am so glad someone used that picture for an av or sig. I love that shot.

 

[a_minimalist]

Since you will not be producing your own product to begin, contact the vendors that you will be getting your product or supplies from. Some will offer terms. As in interest free for 6-12 months.

This is definitely an option but not a given. Right now I figured it would be in my best interest to just assume the worst and that they wouldn't. If they did, that's something to adjust to when it happens.

 

[a_minimalist]

Here's one more tip for you down the road if you get big. You can get a tax break for hiring an ex convict. It is a really good tax break too. Choose wisely, but if you get a good man (or woman) they will work harder for you than almost anyone else on your crew, and the tax break is really amazing. I have never regretted the guys I have hired who needed a chance.

I've added this to my saved document of everything you said before. Thanks! lol

 

[Hostile]

I've added this to my saved document of everything you said before. Thanks! lol

When you have children, take pictures of one doing something for your business. Pay them for modeling, and start a 401k for that child. Remember your S-Corp can match up to 100% of the employee contribution.

College fund.

Oh yeah, I forgot to mention one reason to pay yourself from the S-Corp. It reduces the taxes paid by the LLC. Drastically I might add. If for instance you make $120,000 with your company as an LLC, the LLC pays the S-Corp $100,000 which is then paying your salary your taxes will be on the $20,000 for the LLC and your payroll taxes via the S-Corp.

Now, I exagerrated the numbers to make a point, but anyone should be able to figure the differance on taxes from $120,000 to $20,000 and the additional payroll taxes.

Oh and regarding 401K and matching funds, The first rule of success after pay off debt is to pay yourself. By that I don't mean payroll (which you should keep low for reasons which I can answer later), I mean 401k, Roth, and Savings Account (which is the worst way to invest).

 

[a_minimalist]

When you have children, take pictures of one doing something for your business. Pay them for modeling, and start a 401k for that child. Remember your S-Corp can match up to 100% of the employee contribution.

College fund.

Oh yeah, I forgot to mention one reason to pay yourself from the S-Corp. It reduces the taxes paid by the LLC. Drastically I might add. If for instance you make $120,000 with your company as an LLC, the LLC pays the S-Corp $100,000 which is then paying your salary your taxes will be on the $20,000 for the LLC and your payroll taxes via the S-Corp.

Now, I exagerrated the numbers to make a point, but anyone should be able to figure the differance on taxes from $120,000 to $20,000 and the additional payroll taxes.

Oh and regarding 401K and matching funds, The first rule of success after pay off debt is to pay yourself. By that I don't mean payroll (which you should keep low for reasons which I can answer later), I mean 401k, Roth, and Savings Account (which is the worst way to invest).

I really can't thank you enough. All of this beyond useful! I'm still a little confused about the LLC & S-Corp but I'm going to do some research.

 

[Hoofbite]

When you have children, take pictures of one doing something for your business. Pay them for modeling, and start a 401k for that child. Remember your S-Corp can match up to 100% of the employee contribution.

College fund.

This sounds interesting but what about early withdrawal fees?

I'm totally in the dark about the type of stuff.

Is it just a scenario where you reduce the taxable income from the company at a higher rate than the employee (kid) is taxed and then take the hit in the end because you still come out on top?

 

[CowboySwagger]

When you have children, take pictures of one doing something for your business. Pay them for modeling, and start a 401k for that child. Remember your S-Corp can match up to 100% of the employee contribution.

College fund.

Oh yeah, I forgot to mention one reason to pay yourself from the S-Corp. It reduces the taxes paid by the LLC. Drastically I might add. If for instance you make $120,000 with your company as an LLC, the LLC pays the S-Corp $100,000 which is then paying your salary your taxes will be on the $20,000 for the LLC and your payroll taxes via the S-Corp.

Now, I exagerrated the numbers to make a point, but anyone should be able to figure the differance on taxes from $120,000 to $20,000 and the additional payroll taxes.

Oh and regarding 401K and matching funds, The first rule of success after pay off debt is to pay yourself. By that I don't mean payroll (which you should keep low for reasons which I can answer later), I mean 401k, Roth, and Savings Account (which is the worst way to invest).

Now thats real world, out of the box, progressive, financial intuition.

Beautiful.

This very intuition is the difference from always behind the curve living pay check to pay check with the frustations of the grind and no end to debt in sight, to being in front of the curve building great financial mechanisms and building relationships to ease and make retirement a great time in one's life. It's teaching someone to fish so they won't ever go hungry.

WoW Hos.

How much would you charge for consulting a start up, as to creating a sound, scalable business formation?

 

[braw]

First thing you need is a great business plan. Banks lend on the plan not on your credit. The plan will give them the way you would pay down the loan. The forecast in sales and projected numbers should be based on a similar company. The debt service ratio will be the most important indicator for the bank.

But you need alternative financing such as asset base lending. This means you need financing based on the invoices to your customers. If its business to business selling this would be great. But if this is retail (the public) it would not work. So with this thinking you need to start selling to companies and not the public because you would need inventory.

Then you have purchase order financing based on a sell you made to a company. The lender would lend you the money to purchase the product to sell to your client. The beauty is that you really dont need much to qualify, only the purchase order then the customer company would be the one to qualify for the loan because the lender will give you the money based on the purchase order and have it backed ( collateral) by the invoice of the sell, which the lender will front you 85% of the invoice. That means you have working capital for the next purchase.

Then when your customer pays you the invoice the company has to pay the lender that is still holding the 15%. Which once the invoice is paid in full you get the remaining 15% less the lender's fees.

Repeat this tranction until your company can get approved for an SBA 7A working capital loan or better yet an inventory loan ( to sell to the public).

Before you can listen to all the other advices about company sturture, tax breaks, corporate formation you need to SELL, SELL, SELL. If you do the money will be there. Hope this helps

 

[Hostile]

I really can't thank you enough. All of this beyond useful! I'm still a little confused about the LLC & S-Corp but I'm going to do some research.

An accountant can explain that better than I can. If any read this and wish to correct me I would be grateful.

Okay, an LLC is as you probably know a Limited Liability Company. Income in an LLC can be used as a pass through to employers or owners. That means you can use it to avoid a dividend tax. Only an owner or shareholder (if it is a publicly traded stock company) can be assessed a dividend tax, and that is assessed on the revenue generated.

So most corporations create what is called a Flow Through Entitiy or FTE. That is what an S-Corp is a type of. S-Corps do not pay Federal Income Taxes because their assets are passed through to owners. Hence why you should pay your wife through the S-Corp if you are married. Pay your children too.

All of the monies, including your salary are still taxable, but as salaries not as dividends.

You want to know how the really rich avoid so much in taxes? This is one of the first steps they take.

So, all payments you receive should go to the LLC. Let's say it is called A Minimalist Company, LLC. Now, you have a bank account for your LLC and this is where you make deposits for the company.

You then pay the S-Corp which is your FTE. From that FTE you pay your own salary and payroll taxes.

Much less than dividends at the top through the LLC, and you still keep the money rather than Uncle Sam.

 

[Hostile]

Now thats real world, out of the box, progressive, financial intuition.

Beautiful.

This very intuition is the difference from always behind the curve living pay check to pay check with the frustations of the grind and no end to debt in sight, to being in front of the curve building great financial mechanisms and building relationships to ease and make retirement a great time in one's life. It's teaching someone to fish so they won't ever go hungry.

WoW Hos.

How much would you charge for consulting a start up, as to creating a sound, scalable business formation?

Not sure I am qualified to do so, so I wouldn't charge at all. Just happy to give some advice to friends that can help them. I still recommend very much having a top notch accountant (as I do) and having him set these things up for you. There are multiple reasons for that including his assumption of liability to the IRS since he is licensed.

I could not walk people through the proper steps as an accountant could. I can merely describe them.

 

[Hostile]

This sounds interesting but what about early withdrawal fees?

I'm totally in the dark about the type of stuff.

Is it just a scenario where you reduce the taxable income from the company at a higher rate than the employee (kid) is taxed and then take the hit in the end because you still come out on top?

There are always early withdrawal fees with a retirement plan, which a 401k is.

Yes, it is basically exactly that since a 401k is not taxed.

 

[Doomsday101]

I had thought about opening my own business at one time but when you weigh the pros and cons I was just not willing to make the move. My dad owned his own business for many years and the hours you put in the lack of time off and the constant worry about making it work can weigh heavily on you. Clearly there are Pros being your own boss and I wish you the best of luck should you make this move but before you do look at the entire picture

 

[a_minimalist]

First thing you need is a great business plan. Banks lend on the plan not on your credit. The plan will give them the way you would pay down the loan. The forecast in sales and projected numbers should be based on a similar company. The debt service ratio will be the most important indicator for the bank.

But you need alternative financing such as asset base lending. This means you need financing based on the invoices to your customers. If its business to business selling this would be great. But if this is retail (the public) it would not work. So with this thinking you need to start selling to companies and not the public because you would need inventory.

Then you have purchase order financing based on a sell you made to a company. The lender would lend you the money to purchase the product to sell to your client. The beauty is that you really dont need much to qualify, only the purchase order then the customer company would be the one to qualify for the loan because the lender will give you the money based on the purchase order and have it backed ( collateral) by the invoice of the sell, which the lender will front you 85% of the invoice. That means you have working capital for the next purchase.

Then when your customer pays you the invoice the company has to pay the lender that is still holding the 15%. Which once the invoice is paid in full you get the remaining 15% less the lender's fees.

Repeat this tranction until your company can get approved for an SBA 7A working capital loan or better yet an inventory loan ( to sell to the public).

Before you can listen to all the other advices about company sturture, tax breaks, corporate formation you need to SELL, SELL, SELL. If you do the money will be there. Hope this helps

I would like to sell to the public, through my own website, as well as sell to stores. Whatever helps me sell the most. It's like you said "SELL, SELL, SELL." I'm sort of dependent on my own site though for the simple reason that it really helps set the product apart and establish a brand from the get go.

I really have to thank you for bringing up the fact that banks lend on assets(invoices/purchase orders) because while trying to wrap my head around a bunch of different scenarios and what I would do in them; I always struggled trying to figure out what to do if an enormous order came in. I had thought I would have to go back to my father for money but it's beyond relieving to know that I probably won't have to

Your advice was much more than helpful. Thank you very, very much!