Posted on Leave a comment

Business Basics 105 – Starting a Small Business

The Small Business Administration advises that one of the major causes of failure of small businesses is poor management. This could mean poor planning, cash flow management, recordkeeping, inventory control, promotion or employee relations, among others. It likely also includes poor capitalization. There are several key steps for starting and managing a small business, as follows:

You may come up with an idea and begin discussing it with your friends, family, professors, and other business people. At this stage you need a business plan, which is a detailed written statement describing the nature of the business, the target market, the advantages the business will have over its competition, and your (the owner’s) resources and qualifications. The business plan forces you to be quite specific about the products or services you intend to offer. It requires that you analyze the competition, calculate how much money you will need to start, and cover other details of the operation. It is also a must document for talking with banks and other investors.

A good business plan takes time to write, but you’ve got just five minutes, in the executive summary, to convince your readers not to throw it away. Next comes an outline of the comprehensive business plan. Remember, there’s no such thing as a perfect business plan, it will and should change as the business changes and grows. Getting the business plan into the right hands, finding funding sources, requires research. The time and effort you invest before starting your business will pay off many times later. Remember, the big pay off is survival.

The next step is financing your business. After your personal savings, friends and family are often the next source. Additional sources of funding can include banks and other financial institutions, angels, crowdfunding and venture capitalists, the Small Business Administration (SBA), the Small Business Investment Company (SBIC) Program, and a Small Business Development Center (SBDC). Once you have planned and financed your business, it’s time to get it up and running.

Step three is knowing your customers/market, which consists of people with unsatisfied wants and needs who have both the resources and willingness to buy. After identifying the market and its needs, fill those needs. Offer top quality at fair prices with great service. Not only do you want to get customers, but to keep them as well. Small businesses have the ability to know their customers better and adapt quickly to their ever changing needs. To best know your customers, LISTEN. Don’t let yourself get in the way of changing to meet the wants and needs of the customers.

As your business grows it becomes more difficult to oversee every detail, thus you must hire, train and motivate employees. Yet it is difficult to find good employees when you offer less money, skimpier benefits and less room for advancement than larger companies do. This is one of the reasons that good employee relations are a key to small business management. Employees of small companies tend to be more satisfied with their jobs than their counterparts in big companies because they find their jobs more challenging, their ideas more accepted, and their bosses more respectful. Employees who feel they are part of the team work to make that team, and thus the company, successful. Don’t fall into the trap of promoting employees simply because they have been with you the longest, or are family members, but aren’t qualified to serve as managers. You need to delegate to the most qualified individual(s). You may be best served to fire those who don’t meet your requirements, regardless of their tenure and regardless of family relations, so that you can recruit and groom employees for management positions who you can rely on as you delegate more of your responsibilities.

Small business owners often say the most important step in starting and managing their business was in accounting. Setting up an effective accounting system early will save you a lot of headaches later. Accurate record-keeping allows you to follow daily sales, expenses and profits, and also helps with inventory control, customer records and payroll.

Many businesses fail as a result of poor accounting practices leading to costly mistakes. A good accountant can help you with tax planning, financial forecasting, choosing sources of financing, and writing requests for funds. The key is to find an accountant experienced with small businesses. This critical advisor can help you to not only survive, but also to thrive.

Small business owners have learned, often the hard way, that they need outside advisors, especially early in the process. This includes legal, tax and accounting advice, and also marketing, finance and other areas. A necessary and invaluable advisor is a competent, experienced attorney who knows and understands small businesses. We can help with leases, contracts, operating agreements and protection against liabilities. A marketing advisor is also key and should help you make your marketing decisions long before you introduce your product or open your store. Market research can help you determine where to locate, who to select as your target market, and an effective strategy to reach it. Experience with small business marketing can be enhanced if this advisor also has experience with building websites and using social media. Two more critical advisors are a finance expert and an insurance agent. The finance guru can help you design a business plan and provide valuable financial advice, and an insurance agent will explain the risks associated with a small business, and in your industry, and how to cover them most efficiently with insurance and other means. And finally, don’t forget to seek out other small business owners and discuss and exchange ideas.

Both BauerGriffith attorneys and BG Consulting Group consultants serve as trusted advisors. Let us help you get your business off the ground.

Posted on Leave a comment

Secured Transaction, cont.

In addition to a sigsecured loanned security agreement, a security interest is not enforceable unless the secured party has given value, such as if the secured party provides the debtor with a loan, or sells or otherwise delivers goods to the debtor.

A security agreement may provide for past, current or future loans that a creditor may make to a debtor.  With the debtor’s consent, an existing creditor might obtain collateral for a past loan, and the earlier loan provides the necessary value. A security interest may also secure a loan made at the same time the security interest is taken. In addition, the security agreement may specify that the collateral will secure a loan that will be made in the future. If the creditor makes a binding commitment to make a future loan, that binding commitment provides the necessary value. However, if the creditor merely retains the option to make a future loan, value is not given and the security interest does not attach until the future loan is made.

Posted on Leave a comment

Signed Security Agreement

A security interest is enforceable against the debtor when it has been attached to collateral.  Unless the secured party takes possession of the collateral, attachment requires an authenticated record, typically a written security agreement signed by the debtor.  The agreement must indicate that the debtor has conveyed an interest in the collateral, and include a description of the collateral that reasonably identifies the collateral by item or type.  For example, a description of “all of the debtor’s property” or a similar non-specific description is insufficient.  If the collateral is consumer goods, securities, a “commercial tort claim”, or if the loan is made for the personal, family or household purposes of the borrower, the agreement must describe the collateral in greater detail.  Otherwise, the agreement may describe the collateral by its type, such as “equipment”, “inventory” or “accounts”.

Fountain Pen and Signature

If the collateral is other than consumer goods, i.e. those items that are bought or used primarily for personal, family or household purposes, the security agreement may cover both existing collateral and “after-acquired” collateral provided that the agreement specifically states as such.

The attachment and enforceability of a security interest is governed by Ohio Revised Code Section 1309.203.

The United States Federal Trade Commission restricts the types of consumer goods which can collateralize most loans. With certain limited exceptions, the FTC prohibits a secured party from taking a security interest in most household goods, including clothing, furniture, appliances, one radio, one tv, linens, china, crockery, kitchenware, personal effects and wedding rings. There is no such prohibition on security interests in works of art, other electronic entertainment equipment, items acqured as antiques (more than 100 years old) or other jewelry. See Title 16 of the Code of Federal Regulations, parts 444.1-444.5 (2006) for additional information.

Posted on Leave a comment

The Significance of Loan Covenants

Before signing any documents for a business loan, pay attention to the covenants.  Loan covenants can be affirmative, things the lender requires you to do, or negative (restrictive), things you can not do without the lender’s prior approval.  It is critical that you understand the covenants set forth in your loan documents; violating a loan covenant is a default under the agreement and the lender can choose to call the loan or take other remedial action.

tacomatitleloans-getapprovedAffirmative covenants include providing financial statements to your lender on a regular basis and carrying certain insurance policies, while negative covenants include restrictions against borrowing from another source, making management changes and selling collateral (other than inventory).  There are any number of covenants that may be included in your loan documents, these are just a few possibilities.

Financial covenants require your company to maintain certain financial ratios, such as those pertaining to working capital, net worth, debt, profitability and cash flow, which are calculated based on your financial statements.

In addition to the more traditional business loans, there is also the business line of credit.  The LOC typically includes a borrowing formula based on a certain percentage of current accounts receivable.

Loan covenants are the lender’s way of attempting to limit its risk, and are therefore not to be taken lightly.