There are a lot of questions, concerns and just plain old curiosity surrounding the Brexit situation. Following our own financial meltdown in the United States and all of the crazy things that followed ranging from job losses, to people literally walking away from their homes and mortgages to portfolios getting completely crushed. People lost money like it was going out of style. So what’s up with Brexit, is it something like that? Will there be those sorts of residual problems? News reports are talking about 401k’s and IRA’s potentially taking a hit. What should someone do if anything right now? Financial Advisor, Camari Elllis breaks down the Brexit, the EU, Euros and what you should consider before making any presumptuous money moves.
OR… Maybe there is a OPPORTUNITY presenting itself loud and clear, just yelling “Over here, now is the time!” Remember Baron Rothschild, “buy when there is blood in the streets”.
During a recent conversation with a friend over the pros and cons of a new business venture, I mentioned some of the typical building blocks to getting new ideas off the ground, up and running. Things such as correcting identifying the product, market, location, source for goods to be sold and forecasts of how much money is to be made from the business. The discussion took the usual twists and turns with high levels of optimism regarding the possibilities of success, I maintained a position of focusing on the basics. For me, such basics include the number one thing is having an “Exit Strategy”, as I stated in an earlier post “Top Ten Things …” and secondly to get a business plan. A very simple and hidden truth is that many people do not get a business plan. Not so much because they don’t want to or are unable to, but there are some not so popular things that come out of a business plan. It tends to reveal the shortcomings in a business idea, and at a time when optimism is very high it can come across as a negative amid all the positive energy flow. When the positive juices of a new business idea are flowing, quick answers are shot out to any “pessimistic” revelations just to keep the idea alive and in play. Even a general overview of a business plan will ask some for details on some very basic questions and maybe shine light on some quick answers. Here are a few simple questions you may answer doing a business plan: Who will you sell to? Where will you sell? Where will you get the necessary monies to start the business? How long will it be before you make a profit? How much will you sell the goods and services for? What differentiates this business from its competitors? Who will do the work? How will you pay your employees? What are your business hours? And, and…
While my friend and I went on to have many follow-up conversations focusing on specific details of marketing and such, this conversation ended up focusing on financing the business. Financing a business is one of those questions that may have a straightforward answer or some put together bits and pieces sort of replies. Typically, if you were to go look up how to finance your business there would be a ton of information on getting business loans, leveraging you assets (typically your home), leveraging your Friends & Family network, or dipping into your savings and possibly retirement savings. While the world would have you think that many folks are going about getting up this financing by walking into the local bank or credit union and getting a loan, well not so much. What people are doing is everything else, ranging from selling their assets such as a car or something to dipping into their retirement in order to get started. The idea being to get the financing, focusing on the profitable upside and anticipating making up the difference for any financial sacrifices once the dough comes rolling in. Surely, in most cases the business type and the amount of financing needed will determine the sources used. If you’re going from hobby to hustle, you probably could finance that yourself and test the water on whether or not you can make money from doing your hobby for others. Going from “Side Hustle” to mainstream is the middle ground you might use any money from anywhere, and is usually the biggest leap anyone will take as it will have less assurances for the new commitment but the greatest amount of pure optimism. Then there’s going straight to the business model from the beginning and will probably require focused funds from the start, whether it’s bank, home or retirement fund. Although, I will say going the bank route is good for one thing if nothing else at all, and that is they will demand a worthwhile business plan that makes some sense.
Besides the bank, there is this retirement fund and while advisors left and right advise not to touch this fund, many people do. And it seems that advisors are closing their eyes to this fact just as much as the people who raid their retirement funds ignore the warnings of financial advisors not to do so. Now that we know that this one of things that people are doing to finance their entrepreneurial dreams, it may be good to consider the relative options and possible drawbacks. As my friend and I talked on, he mentioned using his retirement account to fund his new venture and was considering a lesser known path called Rollover as Business Startups (ROBS). In a nutshell, you are able to rollover you retirement account with no penalties into a “C” Corp business that you startup. Typically there is a sponsor involved to walk you through the administrative process and as usual with the IRS there’s plenty paper work and qualification boundaries to work within and maintain. It seems the part of the tax code that details ROBS is simply to allow people to reach into their retirement funds without worrying about penalties and such. If they are going to use that money to start a registered “C” Corp business, in many cases franchises and Real Estate investments or both. Franchisors are set up to help potential franchisees to get started by taking the ROBS path for financing their new business. Becoming ever popular during a recessionary time between 2009 and 2013, many employees that faced layoffs and business shutdowns took this option in order to take control and finance their individual dreams. For some, ROBS allowed setbacks to be turned into an opportunity, using entrepreneurial spirit through and through.
There’s a lot of information out there regarding ROBS, however, it lacks the all-important requirement to do the due diligence of creating a business plan. While you may never actually finish a business plan, it’s considered to be a living document, getting one started is essential to staying grounded on where your business is going. However, if you’re considering a bona fide franchise option from one of the well-established franchisors, then you should be okay because they take of that for you. If not, you’ll definitely need an attorney and a sponsor to get you going and to keep the attorney within reach as you’ll need guidance to maintain the status and not get caught up with later on for non-compliance.
What about the majority of folks that will take from the retirement as a loan or as a flat disbursement? As far as the flat out disbursements, the financial advisor is right on that, simply a no-no. However, that same financial advisor isn’t always dealing in reality, the reality of people seeing their dreams come within reach and that retirement fund being able to get it going. That’s the reality people with the entrepreneurial spirit face all of the time. So for those folks, first things first… if you are able, pay any taxes or fees upfront for early withdrawals, disbursements, etc. if the plan provider allows. That will offset that costs later for taxes due, potential penalties, interest and fines that get tacked on to those amounts. Secondly, keep accurate records of all finances and costs to start and run your business, you’ll need this for tax time. When you file your taxes it is very likely that the costs of starting and running this business will outweigh any fees or penalties for early withdrawal for the tax year, this will reflect as a refund, use this refund to offset any penalties or fees you need to pay for dipping in the retirement pot. Any tax refund received should be used for that purpose until all fees or penalties are paid up. As a new business, it is very likely you don’t turn a profit in the first year, maybe even a few years and you should know that from your business plan -maybe. Sure there will be plenty of revenues, but profits are typically slim in the beginning and if you’ve done a half decent business plan you would be somewhat prepared for that.
Some things to consider regarding financing your business.
Where will you get the money and how much will it cost? Home refi, 401k, Bank Loan, F&F Network, Savings. What will be the interest and how long will it take to pay it back?
If you are not able to or don’t pay it back, then what? Now’s a good time to be honest with yourself and have some sort of plan or at least get familiarized with any penalties or consequences of not being able to keep up your commitments.
Having the money to execute decisions can somehow magically dampen creativity. It’s amazing how creative you can become once the money runs low. Write these ideas down for when you do have money to finance them if they still make sense then.
Having the money to execute decisions somehow seems to make you think all of your ideas are great, even if they’re terrible. Develop a test of some sort as that any spending decision over a certain amount must pass, e.g. calculating the return on capital asset spending. Purchasing an illuminated sign for higher cost will attract more passerby business at night based on visibility and location. The test should include details such as how much more business, a time frame to measure the return and a specific proven target such as passersby or vehicular traffic.
At least attempt to do the business plan, or it may show up later that you didn’t. Likely in lost or slow revenues. Slow money (revenues) can send you scrambling and often opens the door to even worse ideas such as raising prices, which isn’t the answer to slow revenues in most cases.
Using free resources such as S.C.O.R.E. and the SBA are worthwhile to leverage real world experience from old pros, they’ll show you how to evaluate what you’re getting into financially. Just don’t get lost, they can be idealists at times.
It’s a priority to understand Profit and Loss statements, forecasting, operating expenses versus capital expenses, insurance, and taxes.
Of course financing such a risky thing as a business takes some serious guts and gusto when you’re using your own money instead of a bank loan, money that’s probably been saved over a long period of time. Even if you do offset the taxes, fees or penalties with refunds from losses, don’t forget the opportunity cost of lost potential for those investments to grow. There are many other ways, such as taking a loan from the fund, using the loan to buy a property that pays back the loan from rents collected and also allows for you to leverage the property to invest elsewhere such as your brother’s mechanic shop. You’re still missing the upside potential of the money taken out, but if it’s getting you rents on an appreciable property, that’s not too bad because you’re recouping it elsewhere. I just had to add that for the finance advisors, they do have your best financial interests at heart –sometimes.
My colleague, is still in the planning and evaluation stages to see if he can make a profit in his market. He is also considering working with a franchisor which is always an option worth considering since they’ve developed markets, brands and can answer many of the finance related questions related to profit and loss. And, of course they can facilitate the ROBS option for those interested. But is the 5 -15% royalties, fees and use of their puffed up proprietary or required approved equipment worth it? I’m sure he’ll find out, soon.