Economy Project: Funding A Start-Up Business
By Sam Baker, KERA Morning Edition Host
Dallas, TX –
Our Monday economy segment again looks at starting a new business - this time, where to find the money to do it. Many who turn to the Small Business Administration or SBA may talk with Mark Langford. He's Associate Regional Director of the North Texas Small Business Development Center Network. It's a free service to assist those wanting to start their own business. Langford says a strong entrepreneurial spirit in Dallas has helped make the area the 2nd hottest market in the country for SBA loan applications. But he adds now is simply a good time to apply.
Mark Langford: Congress has passed, as part of the economic stimulus package, they've increased the guarantee rate to ninety percent and they've waived the fees which has made it real attractive to the lenders and the borrowers.
Sam Baker: When you go to apply for an SBA loan, what do you need to bring to the table?
Langford: You need to bring a business plan that you can convey your business to the lender. Something they can sit down and get a good idea of what you want to do. They don't want to sit across from you and hear an hour-long diatribe of why you need to open a restaurant. They want to see the facts, the figures. They want to see that you've done the market research to support your cash flow projections, what those assumptions are. They're also looking for what most lenders are looking for when they do a loan, which is a good credit score. Now they're looking for a secondary source of income. What they don't want you to do is rely entirely upon the business to pay your household expenses. They want to make sure you have a secondary source of income to help with your own personal monthly household expenses.
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Baker: This almost sounds like someone applying for a mortgage: you've got to have your financial picture in just the right order and you've got to, what's the term they use, have "skin in the game."
Langford: Yes, and that's another big part you have to have, you do have to have skin in the game.' They're looking for you to have an owner's contribution, owner's equity that you'll put into the business and that can be anywhere from twenty-five to thirty-three percent of your own money to put in. So it is like a plan for a mortgage, and, yes, it's not an easy task to do but it certainly is possible. It just takes having your ducks in a row, it's just like getting a home loan. Mortgages are made every day, SBA loans are made every day, but they're not going to be made to everyone every day.
Baker: I was just thinking, that's kind of hard to come up with when you're in an economy currently in a recession. Does that slow the number of people coming to you for SBA loans?
Langford: Well, it slows the number who get approved, it doesn't slow the number who come to see us. But there are other alternatives. There are microlenders out there. There's a group called Accion Texas, which loans up to fifty thousand. They have a larger program on top of that. For a collateral-based loan, for someone who doesn't have that 25 to 30 percent down in cash, they can pledge collateral, assets they're going to use in the business. They go as low as five thousand and up to fifty thousand. A lot of times what we do when someone comes in with a plan that isn't going to be able to be funded by the bank for whatever reason, we talk about starting smaller, at least beginning it. Because once you begin once you're in business you become a whole lot more attractive to a lender than you are as a start-up. It's a real difficult market for start-ups right now. But if you're in business, and you're making a profit, then you're someone they definitely want to talk to.
Baker: What makes this a difficult market for start-ups right now, is it the recession or are there other factors?
Langford: It's the risk involved, it's the recession. Small businesses at any given time are risky, that's just the nature of the beast. That's one of the benefits of SBA loan programs, they guarantee that loan to the bank. If you would happen to default on a loan, the SBA will come and cover the guaranteed portion of that loan. Right now, with consumers cutting back on purchasing, small businesses, as you can see when you drive around, are dramatically affected. You see them closing, and you're starting to even see franchises close. Franchises which historically have been pretty well insulated they've been able to stand the test of time you're starting to see some of those close down. So, it's a risky environment just because of what we're in. By and by, at any given time, start-ups are more risky than in-business folks because if you're in business you can show them a balance sheet, you can show them an income statement. All the lender's looking to do is minimize risk, so when you can say, Well, for the past five years I've made a profit and I would've been able to cover this loan, or, I've been renting space for three years and all I'm going to do is go buy a building and in place of me making a lease payment I'm going to make a rent payment, I've got a great business, you can see that. That makes it a whole lot easier to the lender, as opposed to, This is what I think I'm going to do and everyone says I have the best enchiladas in town. They like to see the proven track record as opposed to, here's what I think is going to happen.
Baker: You mention there is venture capital out there. Is it hard to find and are there certain types of ideas they're looking for as opposed to those they're not interested in?
Langford: They're looking for ideas that are going to bring a huge return. The banks are looking for loans that are pretty predictable, that when you come in and say, I want to open up a plumbing business, they can look in their portfolio and say, you know we've helped two or three other plumbers and they've all repaid their loan. Or, even better a franchise. "I want to open a McDonald's." Well, we've never had a McDonald's fail. But someone comes in with an idea that is revolutionary, it's technology-driven, there isn't a track record, there's intellectual property involved that may be the type that hasn't even been proven in the market
Baker: All sorts of red flags go off.
Langford: Yeah, the bells start going off and the bank starts backing away from the table. But that's when an angel investor or venture capital may be interested. Because what they're looking for is that revolutionary technology that's going to provide a huge return. The lender just wants to get their money back with their interest. What the venture capitalists want and the angel capital folks want is a huge return on their investment, a 200 or 300 percent, basically a home run. Now, they'll put money on a lot of bets and only a couple of those will come through. But, that's what they're looking for. So, depending on the type of idea you have, it may be a better market to go to a traditional bank or venture capitalists may be someone who are interested in your idea.
Baker: Where do you do the research to find all of this? Obviously, the SBA would be somewhat easy to find or the SDBC, but, for venture capitalists, where do you begin to look?
Langford: There are groups that meet on a regular basis. There's a group in Dallas. Also, SMU hosts, I think it's an every-other-month event, they bring together venture capitalists and prospective folks who have ideas and they put together their business plan and they make a pitch. That's through the Caruth Institute. That's a great networking opportunity for individuals to kind of see what is involved. It's a huge ordeal to go out and get venture capital. They're really going to look heavily at the owner and how much experience they have in the market they're getting into. They're also going to look at the team behind the idea. They're really betting on the team, because the concept is just that it's a concept at that point.
Mark Langford is Associate Regional Director for the North Texas Small Business Development Center Network (SBDC). You can find more information about start-up businesses and related matters at KERA.org/Economy