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bulletWhat do I do first?

         Answer:  Make the decision to go into business 

bullet Can I make it happen?

         Answer:  Most likely!  If you have the experience in your chosen field, a good credit rating and a cash injection of 20% to 50% of the total project and you are willing to work very hard to achieve you goals. 

bullet Is it hard to obtain bank financing?

        Answer:  Yes!  For most small business startups, finding a bank willing to loan 50% to 80% of the project cost is difficult, while not impossible.  Should you not qualify for a traditional commercial loan, you may qualify for a Small Business Administration guaranteed loan or other government programs that are available.

bullet Will I be required to present a business plan?

        Answer:  Yes!  For new business startups you will be required to furnish the financial institution with a complete description of your project.  In addition to the narrative, you will need to furnish all financial documents that show realistic goals and assumptions, such as Performa (projected) balance sheets, Performa income statements, and cash flow projections.  You will also need to include all bids, pictures and any other documentation that will help your banker visualize and understand your business better.

bullet If I incorporate my business will I have to include personal financial information?  How do I incorporate my business?

        Answer:  Yes!  If you are a new startup business, anyone with 20% or more ownership will be required to furnish a current personal balance sheet, income statement, last 3 years income tax statements, and any other explanations necessary.  As a new startup, you will also be most likely required to personally guarantee the loan in the beginning.

        If you are expanding your business and already have a banking relationship, you may not be required to furnish all the information above.  Your financial institution will inform you of their requirements.  However, in the event of an SBA guaranteed loan, you most likely will be required to furnish the bank with the businesses last 3 years income tax returns, last 2 years ending balance sheets, and monthly income statements along with all personal financial information.

bulletHow much collateral will I be required to pledge?

        Answer:  You will be required to back the full amount of the loan proceeds with collateral plus an equity injection equal to 20% to 50% of the total project. Capital assets purchased with the proceeds from the loan and any other assets contributed to the business (cash-in-kind) will serve as the collateral.  You may also be asked to pledge additional personal assets or a co-signer as well, in the event the capital injection is too small or the credit history is weak.

bulletWhat additional protection will the bank require?

        Answer:  The bank will want to be assured that in the event the business fails you will be able to meet the obligation to the bank in a timely manner.

        While this is certainly not always required, if you can demonstrate and prove that you have outside income sufficient to meet any possible negative cash flow, your chances of obtaining a startup loan increases tremendously.  Banks are in the business to RENT money.  They are not in the business of losing money.  Your loan will be graded.  Having additional resources for  servicing your loan will improve your grade tremendously.

bullet Should I incorporate my business or operate as a sole proprietorship?  Where do I go to incorporate my business?

        Answer:  The first thing you need to do, before incorporating, is determine the liability involved in your business.  You should incorporate if:

  1. You will have employees.
  2. You will be delivering product or service.
  3. You operate machinery or work with dangerous chemicals.
  4. You have the slightest possibility of being sued.

         Incorporation will protect the name of your company in the state in which you incorporate for a period of 10 years.  Incorporating your business creates a separate entity from yourself.  Therefore, you will become an employee of the corporation and will have some degree of personal protection in the event of failure or in the event of a law suit.

         Operate as a sole proprietorship if you have very little liability, you are working alone, you are not concerned with the protection of your company name or if your business is primarily a local type operation. 

         When you register you company name with your county clerk, as a sole proprietor, you name will be protected in that county only.  To be protected in other counties you must register your company name in each of those counties.  As a sole proprietorship, you will have full responsibility.  You are the company and therefore can be held legally liable in the event of a law suit.  Your personal assets are also at risk.

          A corporation is protected in all counties of the state in which it is incorporated and your personal assets will be protected to some degree unless, in the event of a law suit, their is penetration of the corporate shield (ask your attorney about this).

bullet What about partnerships?  Is this a good idea?

          Answer:  Partnerships are much like marriages.  You really have to work hard to make them successful.  Unfortunately, most end in business divorce.  Especially partnerships formed with relatives. If you live in a community property state, you are automatically a partner with your spouse.  Therefore, a partnership agreement with your spouse is not required. 

          Should a partnership be required, make sure a partnership agreement is drawn up and every aspect of the business is covered as to partnership responsibilities, ownership, business continuation, etc. (see your attorney about this).