to set aside money for seminars and teacher-training classes. Sure, at the beginning, you will probably be glad if the business makes enough to support itself. Eventually, though, you may want to run not just a self-supporting business but a thriving one. To figure out how many students you would need to support additional expenses, you can use the same formula. Monthly expenses for your optional projects divided by monthly per-student income equals number of students needed to support the optional projects.
Calculating your break-even point and additional expenses in terms of target enrollment makes those expenses “real” in a way numbers can’t: “I need thirty students to break even. No more than twenty of my regular students have been training this month. I need to check to see if I can repair the problem before next month’s bills come due.” “To hire a part-time employee to manage the office, I need ten more paying students.” “To afford the expenses at a new location I need another twenty-five students.” In other words, if you think of your break-even point in terms of number of students, you can look at your monthly sign-up, attendance, and payment records and get an immediate, intuitive sense of whether you are getting closer to your financial goals.
Your First Two Years
In the early months, while you are still building your student base and trying to reach your target enrollment, you will need outside funding to meet your monthly expenses. As a rough estimate, assume that for the first six months you will be paying nearly all your monthly expenses out of pocket. That means before you open your doors you need to know where you will get those first six months’ operating expenses.
Assume that after those six months are over, you will still have to pay out of pocket for some of your operating expenses for up to two years. Why? Statistically, you will not be making a regular profit for two years. Sure, you will have profitable months before then. But you may need two years to figure out what your annual business cycle will be. You will probably need two years to learn to anticipate slow months. And you will probably need two years to save enough reserves to weather them. In short, it normally takes two years before you are out of the building stage of your business and into the maintaining stage. Of course, you might hit a steady target enrollment before then. Some businesses are self-supporting in a year or less. But though you can hope to be out of the building stage in a year, though you can work toward that goal, you should plan to have backup funds available for two years.
How do you handle the financial demands of those first two years? One way is to get a business loan for just start-up costs. You then set up a revolving credit line with a bank or private lender for initial operating expenses. You can draw money from the credit line as you need it, and repay the debt as you have extra profit. Another option is “bootstrapping.” You borrow the start-up costs and keep your day job to meet your living expenses, maybe even to help pay some monthly business expenses, while you’re growing the business. Whichever option you choose, make sure you know where you will get the money for those early operating expenses. You don’t want to get desperate and eat up your family’s nest egg.
Discover Sources of Money Available to You
You will probably finance your business from two sources: equity and debt. Equity funding is the owner’s cash contribution to the business. It can include personal funds and also funds invested by family and friends. Equity funding is money that remains in the business indefinitely. Unlike a loan, it has no set pay-back schedule.
If you don’t have enough money to start a business on your own, you can turn to various kinds of lending institutions. Generally, you will need to be willing and able to invest most of the initial equity in your business. Lending institutions are typically reluctant to provide more than half the start-up funds for a small business. Any loan you get from a lending institution will have a predefined repayment schedule. Under that schedule you must repay specified amounts of principal and interest within a specified amount of time.
Commercial Loans
Commercial loans are the most common kind of small business loan. They come from your local bank, savings and loan, or credit union. The terms and requirements of these different institutions vary widely. If you’re interested in a commercial loan, familiarize yourself with basic lending terminology and read the pamphlets various lending institutions have available. Then make an appointment with a loan officer. Show up on time, professionally dressed for the business world (not the martial arts world), and present your well-thought-out and professional-looking business plan. After you sell the lender on the potential of your business and your ability to run it, they can help you get started on the loan application process.
Government Loans
Another possible source of funding is government loans. Government loans come in two kinds: guaranteed loans and direct loans. Guaranteed loans are loans made by commercial lending institutions backed by a government loan loss guarantee. In other words, the government program functions something like a cosigner. Direct loans are loans made by the government, typically to members of a specific group or for specific purposes.
The SBA loan program offers guaranteed loans. The SBA has a congressionally mandated program whose purpose is helping small businesses gain financing. Most SBA loans are made through the 7(a) Loan Guaranty Program. These government-guaranteed loans are made by banks and other lending institutions. The average SBA loan is for 50 to 75 percent of the start-up costs of a small business, typically around $175,000. The average maturity is about eight years. The SBA also offers a “MicroLoan” program, in which the amount borrowed is less than $10,000 and the repayment period is less than six years. Sometimes (but not always) these loans have a higher interest rate than what the bank offers. Usually, however, they have fewer qualification requirements than the bank’s conventional loans. If you don’t qualify for a loan directly from a bank, you may be able to qualify for an SBA loan.
Be aware, however, that the SBA loan program is a government program and, as such, has government-style quirks. For example, if you borrow money from your uncle Fred, he will probably write you a check and you can spend the money as you see fit. If you borrow money from Uncle Sam, however, the process is not that straightforward. Most SBA loans don’t make payments directly to you. They pay the people you are buying goods and services from. If you want to use the money to buy, for example, a desk, you have two choices. You can go out and buy the desk, submit the receipts, and have the lending institution reimburse you. Or you can go out and get an invoice for the cost of the desk, and the lending institution will pay the store directly.
Furthermore, an SBA lending institution will earmark percentages of the money for specific categories. If you estimated in your application that you will need $3,000 for inventory and $5,000 for fixtures, don’t expect the SBA to allow you to spend $2,000 for inventory and $6,000 for fixtures. Also, you need to make sure that when you say “inventory” and “fixtures” you mean the same thing the SBA program means when they use the terms. The government is not thinking, as you are, about how you will use these things; they’re thinking about how they could sell them and get their money back should you default.
One special SBA program is the Minority Prequalification Loan Program. If your business is at least 51 percent owned and managed by a member of an ethnic minority, the SBA will find you an intermediary to help you put together a loan application and find a lender.
The government also offers direct loans to special groups. For example, the SBA has a loan program for disabled veterans and for Vietnam veterans. The Handicapped Assistance Loan Program offers start-up loans to business owners when either the owner is disabled or disabled individuals work 75 percent (or more) of the staff hours. Special loan programs for women or minority-owned businesses are also available. If you think you might be eligible for a direct loan, check with the SBA or your state lending agencies. SBA offices are listed in the telephone directory under “U.S. Government,” or you can call the Small Business Answer Desk at 1-800-8-ASK-SBA.
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