before you leap...
you a business owner who's dreaming of expanding
into a larger space, or purchasing your own land
for your dream, but be sure to do it wisely. If
you are thinking of using your unused line of
credit to pay for renovations, stop right there!
Please don't violate the number one rule of
borrowing, which is: match the life of the
loan to the life of the assets. A credit
line is short-term debt, designed to be used for
working capital needs such as seasonal
inventory, and ideally paid down to zero for at
least 30 days a year. Renovations and expansions
are long-term, capital investments, for which
you need a term loan, which can be paid back
over a longer period of time. Chances are you'll
need every bit and more of your credit line for
inventory and other unplanned expenses.
get a term loan, you'd be wise to put together a
solid plan, including financial forecasts for
your new operations. And if you are
thinking of buying a piece of property, or an
existing building, for a new or additional
location, you will actually be going from not
one but three new businesses.
there's a real estate project, which might be
owned by the business or owned by the owners of
the business and leased to the business.
there's the relocation and most likely expansion
of your actual business operations.
there are the future operations of the property
one needs its own set of forecasts that will
allow you to project how much money you will
need to borrow, and how and when you will pay it
back. (Financing sources are understandably very
interested in this part.)
do the real estate development forecast, you'll
need to be in close contact with your architect
and contractor. It will include pre-construction
fees such as permit fees, surveys, architect
fees; construction fees such as prep work,
utilities, slabs, roof framing, electrical, etc.
plus allowance for the dreaded "change
create projections of your actual business
operations, you’ll need to be in close contact
with your accounting professional. You'll
want at least two sets of monthly projections: a
projected income statement or profit plan, and a
cash budget. The cash budget will show your best
guess as to what cash is coming in from sales
and what cash is going out to pay expenses,
including principal payments and interest back
to the bank. Why is it important to have both?
Because while your monthly profit plan may show
an ending positive profit, your ending cash may
show a negative cash situation. And cash, as
they say in the financial biz, is king.
for each these, you'll likely want at least
three different scenarios based on best case to
worst-case projections of sales and expenses.
building operations will be a profit plan on
your building, showing projected revenue from
rent and common area reimbursement and expenses
going out for property taxes, management fees,
utilities, and reserve replacement.
all this sounds a bit overwhelming, just
remember you don’t have to do it all at once
and you don't have to do it alone. Besides
enlisting your accountant and builder, there's a
wonderful resource out there for you - the
Small Business Development Center, or SBDC. It's
very likely that there is an office located near
you. The SBDC offers no-charge professional
advice to small business owners. The counselors
are extremely competent, and are often former
business owners themselves. In Washington State,
for example, you'll find a local counselor by
typing in www.wsbdc.org.
If they are in another state, use Google or
other search engine. For example:
“SBDC Denver” immediately brings up an entry
for the local office there. SBDC counselors have
Excel worksheets and samples of projections and
business plans. They can also help with market
research and direct you to the right funding
sources depending upon your need.
your dreams, but be prepared. If the thought of
doing all this “what if” has you paralyzed,
just remember that the one thing we do know for
sure when we make projections: You are indeed
bound to be wrong in some way! However, a best
(educated) guess, with professional input, is
your best hedge against the future unknown.