your watch during the interview. Present your request clearly and honestly. Ask questions if you don’t understand something.
Expect your lender to ask for three sources of repayment: standard repayment, collateral, and a personal guarantee. You probably plan to repay your loan with the proceeds of your business. Expect to prove that you can do so. Expect also to be asked for collateral. Loans in which assets are pledged as collateral are called “secured loans.” If yours is a secured loan, and you aren’t able to pay off the loan, the bank takes over ownership of the asset you’ve pledged. Small business loans are often secured loans. If you don’t have collateral, you may find that getting a loan is more difficult. Don’t necessarily assume, however, that it’s impossible.
Besides collateral, your lender may also ask for some form of personal guarantee from you, the owner of the business. In other words, if you cannot repay the loan from the proceeds of your business, you must repay it from personal funds.
You may ask, “Do they really need three sources of repayment?” Perhaps not from a mere bookkeeping point of view. What they really need, what they secure by asking for three forms of repayment, is the assurance that you are motivated to repay your loan. You have to admit that the thought that they could tap into your assets or even your personal bank account is a powerful motivator. By allowing them three sources of repayment, you prove that you are both able and highly committed to repay your loan.
When applying for a loan, you will, of course, want to be as persuasive as possible. But never do so at the expense of the truth. Do not inflate your assets or your projections. If anything, underestimate your projections. Why? Not only is it unethical to overstate your financial status, it’s illegal.
On the flip side, the federal government has protected your right to apply for credit. The Equal Credit Opportunity Act (ECOA) says no one may deny you credit based on sex, marital status, race, national origin, religion, age, or receipt of public assistance income. Neither can the bank refuse to lend you money based on the personal traits of potential customers. The ECOA doesn’t guarantee that you will get a loan, only that you will not be discriminated against in the loan process. If you want more information, contact the Federal Trade Commission.
A little advance planning can save you a lot of financial worry over the years. First, make careful, realistic estimates, always allowing enough buffer for emergencies and unforseen expenses. Break down your budget in terms of number of students needed and target enrollment. Work up a detailed business plan, and develop both short-term and long-term goals. Then find the most appropriate financial partner available to you. If you learn the basics of financing a small business before you start spending money, you can build your school on a solid financial foundation right from the start.
CHAPTER THREE:
L AY THE BUSINESS GROUNDWORK
Assemble Your Team of Advisors
Running a small business means doing a variety of jobs. The life of your business requires you to make professional decisions about everything from finance to dealing with the government, from insurance coverage to advertising. How do you do it all well? You get help.
You need to have a relationship with an accountant, an attorney, and a banker, before you need them. These business professionals have specialties. You will want yours to be familiar with the needs of a small service business.
Don’t be afraid to interview several accountants, attorneys, and bankers before choosing one. Make sure your advisors have experience with the kinds of things you need them to do. Make sure, also, that they have the same philosophy of business you do. For example, if you want to pursue every possible income tax deduction, you don’t want an extremely conservative accountant. If you are running a small business, you don’t want an attorney who works only for multinational conglomerates and considers your small businesses a waste of time. Find advisors who share your values and understand your business priorities. Look at who they have as clients. Does your business fit in with their client list? Then, listen to them when they answer your questions. Do they talk with you in terms you can understand?
If you have students who are attorneys or accountants, you may want to engage their services for your business. Be sure to pay them or offer like-valued services in exchange for their help. If students feel that you are taking advantage of them, you could lose them, both as students and as advisors. Moreover, be sure these students can get away from their business when they’re studying with you. One main reason working adults sign up with a martial arts school is to spend some time each week forgetting their job. Make sure your students who work for you do so during their work time, not during their recreation time.
Accountant
At a minimum, have your accountant do your business income taxes. The IRS tax code makes it difficult and very time-consuming for untrained individuals to do their own business taxes. Having your accountant do your taxes can not only save you time and aggravation but also save you money.
A good accountant can be a valuable consultant not only at tax time but whenever you need insight into financial matters. For example, ask your accountant for a list of the licenses and tax forms you will need to open and run your business. Accountants deal with such things as a part of their job. They should be able to make sure you haven’t forgotten something crucial.
By the way, if you can’t read a financial statement, don’t hesitate to ask your accountant for help. Reading a financial statement is a matter of understanding ratios. Your accountant can teach you which ones are necessary for you to get a good idea of how healthy your business is. (See chapter 12 for more information on financial statements and ratios.)
How do you find a good accountant? Ask business associates, your banker, your attorney. Look for someone who is a member of a state or national professional accounting association. Most of these associations require their members to subscribe to a code of ethics. They also require continuing education, which is crucial for an accountant who wishes to keep up with new accounting methods and the ever-changing tax code.
Accountants typically have a price list for various services. It’s a good idea to get that list before you begin a relationship. In fact, get the list before you begin making financial estimates for your prospective business. Budget enough money to hire a good accountant right from the beginning.
Attorney
Do you need an attorney? Yes. It’s an attorney’s job to know where the legal land mines are. Especially if you’ve never owned a small business before, attorney’s fees will probably be a small price for peace of mind. An attorney’s function is not just to get you out of legal trouble. A good attorney can help you avoid legal problems before they happen.
For most of your needs, you want a basic business attorney, in other words, a corporate attorney who knows small businesses. Describe your business needs to the attorney. If your needs lie outside her specialization, ask for a referral to the correct specialist. Many attorneys work in large practices with experts in several different specialties under one roof. These large firms give you the advantage of multiple resources when you need them. Always have one main attorney representing your interests, though.
When you go in for the initial interview with an attorney, in fact any time you go in for a consultation, have a list of questions. Time with an attorney is not cheap. Do some advance planning. Use your attorney’s time wisely. Doing so is using your own money wisely.
Banker
Of course you will want a checking account with a bank. But more than that, you should have a good business relationship with a bank. A good bank can handle your accounts, provide you with a line of credit, handle your credit card transactions, and even give you valuable business information.
Make an appointment with the manager or account representative of several banks in your area. Tell them you’re opening a martial arts school in the neighborhood and are interviewing banks. Compare overall service, fees, and whether they offer the specific services you need. In your interview with a banker,