Tip 03 - How to Get the Money

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.