Per request after my last starting a skateshop tip, here’s my philosophy on raising the money to start a skate shop.
You’ve got two options–debt, or equity financing.
First, let’s define what is meant by “debt” and “equity.” Debt is when you have to pay the money back to someone or something. We’re talking about loans. Loans from banks, loans from family, loans from friends, credit cards, stealing money from your boss’s till with plans to pay it back, etc. Equity is when you get someone or something to invest in your business. They give you money, and they own part of the company.
Pros of equity financing:
1. No debt. Or anything that comes with debt, like monthly payments, dings on your credit, etc.
2. I can’t think of any other pros.
Cons of equity financing:
1. You’ve got a partner. When someone invests in a business, they want to get their money back, plus a healthy return on it. Let’s be clear here–anyone who invests in your business is NOT going to be happy if you blow their money and then say “Sorry, it didn’t work out, but you knew the risks.” If you just give them their money back, they will not be happy. They will not be happy unless you pay them back within 1-3 years, plus 25-50% more than what they put in. They’re thinking they’re going to get rich off of you, so you’re pretty much set up for failure unless you do really well, and the sad fact is, you’re probably not going to do really well if you’ve never done this before.
If a partner doesn’t think you’re running the business right, they’re going to start giving you suggestions, and they’re going to expect you to take their suggestions seriously. You’re going to start getting all sorts of advice and criticism. “Why don’t you sell the stuff they sell at Hot Topic? Aren’t skaters into that? Why don’t you have a swimsuit section? Why don’t you turn this into a skateshop / bike store? Why aren’t you selling rollerblades? I don’t want you selling Zero, I’m just not into all the skulls.” You get the picture?
2. Personal relationships. If you get a family member or a friend to invest in your business, recognize that this is not equity financing–this is a loan, because you’re going to pay it back even if your business goes out of business, or you’re not going to be very welcome at family reunions or parties.
Pros of 100% debt financing:
1. No partners.
2. No personal guilt if you borrow from a bank.
Cons of debt financing:
1. Debt payments. This is how it’s going to work out if you go into debt. Six months down the road you’ll have spent all the money the bank gave you, you won’t have paid yourself since you started the shop, you brought in $10K this month, and out of that you’ve got to pay $3K for rent and utilities, $5K of it was cost of goods sold, and so you’ve got $2K left over that you could pay yourself with, except that you’ve got a $3K loan payment you have to make, so you’re actually $1K in the hole. And the next month it’s going to happen again.
2. Signing your life away. “If I go out of business I’ll just file bankruptcy and then I won’t have to pay the loan back.” No, it doesn’t work that way, no matter what anybody has told you. When you go to get the loan, they’re going to make you sign what is called a “personal guarantee” and what that means is that you are saying that no matter what happens, you will pay this loan back, and the bank can take whatever measures it need in order to force you to pay it back. If you have a house, they’ll sell it and take whatever equity you have in it. Cars? Yep, they’ll take those too. If you’ve got it, they’ll come after it.
3. Guilt, if you borrow from a human being. If you don’t borrow from a bank then you’re going to ruin your relationship with whoever you borrow from. If you borrow from your dad, plan on your relationship with him never being the same again. Plan on longing for the good old days before he ever gave you that money. If you borrow from your brother, plan on your brother calling you every week asking when you’re going to pay him back. If you borrow from a friend, plan on losing that friend. And plan on lots and lots of guilt, to the point where you feel like you can’t pay yourself or do anything fun until you have that debt paid off. You want to buy a 99 center hamburger? Prepare to feel guilty about it. You want to put gas in your car? Why not fill up your car with guilt while you’re at it?
4. Slavery. The debtor is slave to the creditor. If you own someone money, you are their servant, their slave, their whipping boy. You will do whatever they say. You’re a prisoner until you get that debt paid off, and you will find yourself thinking you would gladly trade places with someone who is in prison if it meant your financial debts would be paid off.
These rules don’t just apply to a skateshop but to any type of business. Think I’m being overly harsh? I’m speaking from experience, so if you don’t have any experience I’d recommend you trust me on this one, because I’ve been through some things you haven’t.
Now that I’ve put some fear on you, here’s the good news. There are some exceptions. The bad news is, it probably won’t be you. If it were me in your shoes and someone were holding a gun to my head telling me to start a skateshop or else, what would I do? I’d go with a loan from a bank. There’s none of this guilt, because it’s an institution, not a human being. They’ll hold you to the rules, but it’s for your own good. And I would make absolutely sure that I had a rock solid plan for this shop, because I don’t want to be sitting there 12 months later with an out-of-business skateshop and $100,000 in debt that I’m going to have to find a way to pay off working a $15/hr construction job. Diving into starting a skateshop because it’s going to be so much fun and I’m going to make money and get all sorts of free stuff is to be an idiot. Granted, some idiots get lucky, but for every one that’s lucky there are 10 who aren’t.
I would never recommend borrowing money from family or friends, nor would I get them to make an “investment” because there’s no such thing as a family member or friend making an investment. I would never use credit cards. If it were me, I’d find some way to save up $40-50K and start with a hole in the wall place and bootstrap the whole thing. That way, if you go out of business you’re out the money, but at least it’s over and you don’t have to pay anyone back. And if you’re spending your own money you’ll be a lot more motivated to make it succeed.
In fact, this is a great test to measure whether you’re serious about starting a skateshop. It’s always easier to borrow $100K and blow it because it’s someone else’s money, so think about it this way. If you had $100K in your pocket, free and clear, and you could do anything with it, would you start a skateshop with it? You see, some people get excited about starting a skateshop just because they think they’re going to have all the skate stuff they want. Well, if you had $100K in your pocket you could get all the skate stuff you want, and you’d actually have time to use it. If you run your own shop then you’ll actually feel guilty anytime you take a shop deck off the wall for yourself because you’ll be thinking “Dang, if I leave this up there I can sell it…”
But hey, don’t just take my advice, go talk to at least five other people who have started successful skateshops and ask them how they did it and where they got the money from. I guarantee you’ll learn a lot. And if you still decide to do it, then best of luck to you, because I’d much rather see more independent shops around than these mall shops like Zumiez going up all over the place.
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This is the reality of starting your own shop. I agree that the best way to start your own shop is to save and write a well written business plan. Two years might seem like a long time to wait, but you’ll have the capital to launch and a great plan to guide you. Remember the business plan if for you first and foremost and you need to change it and update it often.
I started my business with my savings and more than half went right into the building for repairs and to bring it up to code. I could have found another building that I could just move into and setup shop, but I really liked the location and the layout. I had to start slowly and I’m glad I did. At first I wanted to fill the shop with everything I could buy, but in order to stay open you need to have money set aside to cover at least two months and emergencies. It’s scary especially when it comes to purchase orders, you need to be realistic and know your local market.
Don’t be afraid to ask or show the kids your catalogs and include your employees and get them involved in purchasing but don’t let them go crazy remember you need to move this stuff. My favorite saying is “This ain’t no museum”. I had a former boss that would always say this to us and his voice still haunts me, but it helps me choose items to sell rather than just getting what looks cool or letting vendors take over your business.
Utilize your credit and get some good cards and some sweet offers but be picky and wait for the right ones to come around. After you open your doors everyone is your best friend and the card companies will throw you some sweet offers with huge lines of credit, so snag a good one when you see it, but use these with caution. I moved my purchasing over to credit cards to increase my purchasing power because now Net 30 turns into six months or a year interest free. I recommend continuing good accounts payable practices by paying off debt every month and your credit score will continue to increase.
Last bit of advice to include in your plan is a contingency. The shop might not do as well as you hope and you still have to cover your expenses so be prepared to get back out their and work for a regular paycheck. There are also temp agencies, construction jobs, and my personal favorite, plasma centers that can cover the bills in a hurry. Just be aware that if you want this business to succeed you might have to do anything to keep it going until you can make it work and pay yourself. On a side note, don’t expect to pay yourself for the first couple of years, put it back into the business and built it up.
That’s just my bit of advise based on how I did things. It would have been easier to just get a huge loan and rock it from the start and if you go this route that’s awesome just be cautious and remember you have to pay it all back with interest.
Chris
If I ever decided to open up a skate shop,the start-up money would have to fall in my lap.Or I’d just go with my original plan of self-service barbershop.Or waterless laundromat.Like those waterless car washes.
I’ve been dreaming of starting a skate shop for years. There’s this little strip mall with a 800 sq foot office space right on the corner before entering a Wal Mart that is just begging for me to open shop. Trouble is I barely make enough to pay the mortgage, utilities, and put food in the fridge. My credit isn’t that great and I called the bank and a few other lendors about getting a loan and I got denied at all of them.
My suggestion to those out there that still got the hope is get a credit card (just one) and get the largest credit line you can get and keep the smallest balance you can. If you can keep a balance under 15% of your available credit and maintain that for a year, your credit will sky-rocket and so will your chances of getting a fatty loan for the shop you been dreaming to start.
For now, I’m trying to throw dollars in savings by selling old tools, cds, and video games. And selling the occasional used deck at the skate park. I’ll get there someday.
Maybe someone can chime in on how to get the money I need when I have bad credit and no real assets.
Matt, If you are serious then start right now. I know this might sound strange, but consider you are starting the business today, right now in fact. Open your wallet how much money do you have and how much do you have in savings that you can spare? Do whatever it takes man, skip meals especially going out to eat and buying soda, quit smoking, quit driving your car, skate, walk, ride a bike, bum rides, seriously whatever you can to save money and put it away and save it if you truly are down you’ll get there and on the plus side you’ll be healthier too!
When money is tight you still have options unless you are currently without a job, then that’s an obvious problem that needs to be fixed first. So don’t even waste your time dreaming about starting a biz unless you are living at home with your parents in that case hit them up and see if they can help, don’t they love you? I could tell you a few way to get money, but I’m not recommending them… Fake a mental illness, it’s easier then you think. Just go down to your local library and read the DSM4. I know someone that makes a very nice living eating and watching TV because he read enough to fool the doctors and is now 100% disabled. Mental illness can be hard to prove and their going to dope you up on something that will have side effects and cause real problems so use this too. Plasma centers are cool for quick cash and you can do it three times a week get paid right there and get free juice and cookies, just be warned that these places are frequented by the homeless. I once saw someone puke all over themselves and then when I went to leave the same person passed out after exiting the building. The bum closest to him robbed him and I didn’t donate for a long time after that. Loved ones are great because they truly want you to succeed and do well for yourself, but you have to ask if you can honestly make it work and pay them back! Seldom do people actually paid others back, their business will fail or something stupid will happen and then you’re both assed out. Be honest, that’s the best way to be after all so ask yourself if you have the resources to make this work, because if you don’t know then you gambling and chances are you’ll lose.
My advise is to save money and put it away! Work on developing contacts for your primary area of focus because some of these companies won’t sell to you until you’ve been open for awhile even with a shop so find out how that whole gambit works. Set up your business plan, find information on your area, start looking at buildings, fixtures, go to trade shows and start doing the work. If you don’t have money yet you can still get a lot done and at the same time you’ll quickly realize just how expensive and involved this whole thing is. I also recommend you go buy a day-planner and start filling it up with all the random things you’ll need. It’s like pieces to your own business puzzle and you’ve just got to figure it out and put it all together, but the most important thing is that you have to work on it constantly. Remember it’s like a baby and you need to focus your attention on it constantly and feed it and just figure out what it needs. Oh wait I guess it’s more like a twinkle in your eye, but your not sure if the girls really into you or not so find out it you can make things happen first or get over it and move on.
FYI last night I read a billionaire success story and basically he worked all sorts of odd jobs before finding something he like doing and did it for twenty years saving his money his whole life first then starting his own business.
Hope you get something out of this,
Chris