Say you’re having drinks with some smart friends on the weekend and you come up with a half-baked app idea.
You take some time after work to try and refine the idea. A few hours after a day in the office turn into all nighters. Phone calls with your friends from the bars turn into meetings or Skype sessions.
The sketches turn into lines of code, and the conversations turn from fantasy into reality.
Now you’ve built a product or prototype. You’ve started market research to begin identifying customers. Things look good. You’re getting close.
Now comes the hard part. You love your idea and you love the work you’re doing to build your product. However, you can’t keep up the pace of development while you’ve got a day job. You need capital.
Sketching out your future might be a blast, but finding ways to fund your dreams can be terrify-ing. Add to this the fact that CEOs are getting younger, and this new generation of innovators might not have the network or expertise in business or finance that the older generation does. Most young startups founders will have to look somewhere for funding, and for those of us that don’t have a strong network or are opposed to borrowing from friends or family, bank loans are a great option.
While “loan” may seem like a scary four-letter word to some recent college graduates, it can be a fantastic route. I had a chance to speak to some folks from Wells Fargo to help come up with a few ways to make the business loan process as easy and beneficial as possible for a young startup business.
1. Be on top of your personal credit.
Even if you have the best idea in the world, it doesn’t mean squat if you’ve shown you can’t spend responsibly in your personal life. I know it seems like opening a business shouldn’t be affected by that time you spent $500 on Amazon and were late on your credit card bill. But it can be.
The truth is, it’s never too early to take charge of your finances and consider your personal life a reflection of your viability as an entrepreneur. Everyone, this writer included, has been late on a payment before. These things happen. But if you’re considering starting a business and asking for a loan, it’s important to make sensible financial decisions. Pay your bills on time. Don’t over-spend. Never, ever max out or get close to your spending limit. Ashley Simmons, business banking relationship manager at Wells Fargo, says the magic number for credit utilization is at or below 30 percent.
Without business records or a business account, your personal credit history is what bankers are going to check to see if you’re a responsible borrower. According to Simmons, this is one of the biggest and most common mistakes business owners make. It’s hard to evaluate how someone’s business is running if he or she only has a personal account—which can be a mix of both business and pleasure—to go on.
2. Get a business account, even if you don’t think you need it.
Sure, you’re building a web or mobile app, and for the time being, it’s cheap. Or, maybe you have a nice rainy day fund to cover your expenses even if your product isn’t cheap to create. That’s wonderful, but you should seriously look into opening a business banking account.
It’ll make life easier for you, your investors and your bankers. Having a clear record of your business expenses, payment activity and payment times shows bankers and loan officers exactly how well (super well, I’m sure) you handle your young company’s finances. Your company is your baby, so take care with it. You don’t really have a good excuse either. Most business bank accounts are free.
The benefits of building business credit as a potential borrower are great, but there are other perks that apply even for people that don’t anticipate needing a loan. There are “tons of pro-grams”, according to Simmons, where you can earn cash back or other rewards. Free money isn’t a bad deal.
3. Know your debt load to income ratio
This is a scary one. Most recent college grads live in fear of it.
Let’s talk about debt.
The debt load to income ratio is one of the most important metrics that a lender is going to consider, first within your business accounts (which you now know you should have) and then your personal credit history.
We’ve got another magic number here— 30 percent (again). If your business is bringing in $1,000 a month, you want debt payments to be no higher than $300.
Additionally, if you’re still using a personal credit card, you’ll want to attack those college loans or other debts immediately. The minimum payment is just that—a minimum. Show lenders you can handle your debts quickly and on time and try to pay off outstanding debts as soon as humanly possible. This might mean living a bit lean to make bigger payments, but if thousands of college students can survive on instant noodles and black coffee, you can handle saying no to that extra guacamole or Hulu plus,. Eliminate those frivolous expenditures and put that money into settling your debts.
4. Maximize your cash flow, or, the parable of Tom Haverford.
Tom Haverford is a fictional character portrayed by Aziz Ansari in Parks and Recreation. In one of the most underrated B-plots in the series, Haverford opens a series of ultimately unsuccessful startups. Perhaps the most notable is Entertainment 720. Check here to see what I mean about Tom Haverford and the issue of cash flow and expense ratios.
A ping-pong table is forgivable. Maybe even a kegerator or a fridge full of snacks. If you’re look-ing to draw in talent or promote your brand or image, some cool stuff like this is important. But keep your eye on (yet another, and yes the last) magic number. According to Simmons, lenders are absolutely looking for your cash in/cash out ratio to be $1.25 at minimum.
There are a few ways to do this.
Simmons suggests accelerating cash inflow. If you’re working with employees or contractors, “sending invoices out quickly, following up immediately and offering several different payment options” can help keep your payments up to snuff.
Watch your outflows. Think outside of the box and consider barter arrangements with vendors you use often. And make sure you’re saving properly for your tax bills. It’s easy to get lazy and forget about this one, which can impact your expenses hugely. Challenge everything—never get complacent about your spending or spending habits.
Most importantly, don’t be Tom Haverford. Develop your product before you hire an ex-NBA pro to shoot baskets in your lobby.
5. Ask for help. Qualified help.
This is a simple one, but perhaps the most important. Developing a product is hard, and when you throw in financing, life can turn into what seems like an unmanageable burden.
There are people out there to help you, though. Ashley Simmons is one of those people. Her position exists to make your life as a business owner easier. That’s what she gets paid to do, and that’s what she loves to do. Wells Fargo has special training programs for bankers who are interested in helping businesses get started.. This means you can call up Wells Fargo, and set up a meeting with someone who knows her stuff in just a few minutes.
In fact, you should probably just do this instead of reading this article. In just a few phone calls with Ashley I took down several pages of notes. These people are a fountain of information, and getting in touch with them is easy. Don’t be afraid to admit you’re lost. We all need help sometimes. The business world can be harsh and unforgiving, and ignorance can spell doom for a fledgling company.
As a bonus, here’s a supercut of Tom Haverford’s business ideas if you’re looking for somewhere to start. As far as I know, none of them have been trademarked. My personal favorite is the talking tissue box.