Latest / The SmallBizChat with Melinda Emerson / Where Can I Get Some Money

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Where Can I Get Some Money · The SmallBizChat with Melinda Emerson

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  3, 10, 1, 0, ignition, liftoff, Ending small business failure.
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  Welcome to the Small Biz Chat podcast with a number 1 small business expert Melinda Emerson.
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  Bolinda's goal is to end small business failure, and she'll give you the information
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  you need to succeed and live the life you've dream of.
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  Now here's the small biz lady herself.
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  Melinda Everson.
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  Hi, everybody.
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  This is Melinda Emerson, the small biz lady, and I'm so excited to be talking to you today
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  on the small biz chat podcast.
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  And today, we're gonna talk about Where can I get some money?
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  You know, this is the number one question that I am so often asked by small business owners
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  who are interested in growing their business, or sometimes even, you know, people ask this
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  question if they're about to start a business.
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  And I thought it would be really helpful to have sort of like a brass tax conversation with
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  everybody about this topic because I believe that there's a lot of misinformation out here,
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  and there's a lot of, what do I call fantasies of grandeur about about this kind of stuff.
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  And so I think that it's really important for us to talk and think about when we think about
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  funding a business, particularly funding a startup business, or, you know, if you've been
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  in business for a while and you notice that you're constantly having cash flow challenges
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  and that you know, it might make sense for you to, you know, get a lot of credit or get a
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  business loan.
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  I really do think that there are some, you know, fundamental things that you need to know
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  upfront.
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  And and and first of all, the the thing that I like to tell small business owners all the
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  time, startup folks, is that in most cases, the money to start your business is gonna come from
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  you.
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  It's gonna come from your right or your left pocket.
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  And so it's really important that you have some skin in the game that you have some money to
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  set aside to invest in your business.
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  And so how do you do that?
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  Right?
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  Well, first of all, if you are a single person, you gotta cut back.
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  I mean, you really should be saving 20 to 40% of every paycheck a year or 2 out before you
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  start your business.
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  And you need to do that for 2 reasons.
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  Number 1, you need to save money so that you can have your initial operating costs for your
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  business.
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  But you also need to save money because you're gonna have to have a rainy day fund for your
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  business, not just an emergency savings account for your household, but actually one for your
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  business because stuff happens.
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  And then you really gotta think about how you're gonna do that because unless you are
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  starting a business that has the potential to put a 1,000,000 eyeballs on your product or
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  service, you are really not going to build something that an investor really is is
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  terribly interested.
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  And so there's lots of people out here.
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  There's, you know, venture capital networks and angel investors and all this stuff.
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  But honestly, those guys are looking for scalable technology driven businesses, maybe
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  perhaps a business that can be franchised, but it's gotta be a big business that's scalable.
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  And you know, most people are not starting this kind of businesses.
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  So unless you're starting, you know, an app or, you know, some kind of business that is
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  scalable with, you know, that that's the only way they're gonna get their money back.
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  So I don't want you to waste a lot of time chasing investors when your business isn't the
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  type of business that would be attractive to investment.
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  And so, you know, product based businesses are far more attractive than service based
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  businesses because service based businesses are hand to hand combat.
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  It's relationship driven.
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  You gotta go out there and earn a customer every time.
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  And so it's really important for you to, you know, figure out what kind of business you're
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  starting and whether or not your business is big enough or or or what could be big enough to
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  attract investment.
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  And then if you're not necessarily gonna be have an opportunity to go and pitch investors.
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  You know, it might make sense for you to go around and do pitch competitions to raise
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  money.
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  But just know anything you do other than run your business is a distraction.
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  And you could spend 2 years running around doing pitch contests and really not have a true
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  proven concept of your business.
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  I really like to encourage people to do pitch contest certainly once they have a a a viable
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  product, but I like to tell people to go do pitches when they have sales.
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  Like, when you can really speak to testimonials and how you help people.
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  You're a lot more compelling in a pitch contest.
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  You know, I have been a judge for many, many a pitch contest.
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  And the people who resonate the most are the people who know their customer, know the profit
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  margin of their product.
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  They know their costs.
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  They know their numbers.
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  They're shrew.
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  They're a good salesperson.
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  They're engaging.
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  I mean, those are the people that win, but it takes a lot of time to get there.
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  You know, your first pitch is not gonna be your best pitch.
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  You've gotta practice your pitch.
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  You've gotta know your numbers.
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  It's amazing to me how often you see people on Shark Tank, and they have this incredibly
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  inflated sense of what their business is worth and all this stuff.
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  And you know, so they end up, you know, offending someone that could be an investor.
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  Yeah.
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  But you even have to weigh the shark tank thing, right, because to me, shark tank is
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  about getting a deal maybe.
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  But most of the time, it's about getting publicity for your product or service, whether
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  you do a deal or not.
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  So there are strategic reasons to go on shark tank and pitch, but you really gotta be ready
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  no matter who you're pitching.
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  So that's another option.
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  You could, you know, sign up for a bunch of pitch contests.
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  The other thing you could do is crowdfunding.
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  Right?
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  So let's let's have a real conversation about crowd funding.
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  The average crowd funding campaign raises $10,000.
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  That's not a lot of money.
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  You could actually just go run your business and get that.
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  So you've gotta think about whether or not you're going to take down your focus from
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  running your business to then focus on this crowdfunding campaign and all the emails and
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  all the investor follow-up communications and and really the best crowdfunding campaigns that
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  I have seen actually are product based businesses.
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  And you have to have an amazing 1 or 2 minute video about your why story for this product.
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  You know?
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  And and I've seen it I certainly have invested in crowdfunding campaigns, but it's usually
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  because I wanted the thing that they were trying to sell or it was because someone I
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  knew, and I I just wanted to support them.
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  But just know that everybody and their mother has a crowdfunding campaign.
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  And, you know, the 1st 30% of people that invest in a crowdfunding campaign are typically
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  people that know you.
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  So if people aren't supporting you before you launch a crowdfunding campaign, let's be really
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  clear.
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  They're not gonna support you just because you need money and you decide to put up a
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  crowdfunding campaign.
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  I mean, think about it.
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  Who is gonna invest in someone just so they could one day maybe hopefully become a
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  millionaire.
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  Like, that you you have to give people more of a reason than other than I need money.
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  People really in a crowdfunding campaign.
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  People are all about what they're gonna get for their money.
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  What are are they gonna get the product?
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  Are they gonna get a t shirt?
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  Are they gonna, you know, what are they gonna get?
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  So your giveaways from your crowdfunding campaign probably are 60% of the part of the
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  reason why people decide to invest in you.
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  The product's compelling.
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  The story's gotta be compelling.
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  And the and the products, the giveaways have gotta be compelling depending on the level of
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  funding that they give you.
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  So, you know, crowd funding can work.
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  It has worked.
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  I mean, there's certainly people that have made a $1,000,000 of crowdfunding, but know that
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  that's extremely rare.
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  That's not typical.
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  The typical crowdfunding campaign That's $10,000.
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  So you would do better just trying to run your business and grow your business organically
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  than doing that.
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  But, you know, the the thing that I wanna talk about related to funding is you really before
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  you start pursuing funding for your business, You need to be honest with yourself about
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  whether or not a business loan is really the problem in your business because it could be
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  your business model is the problem.
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  It could be you're just not selling enough, or your product is not priced appropriately to
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  earn you a profit margin.
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  So you really wanna make sure before you borrow money that you have a really clear way that
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  you're gonna turn that money into more money so that you can pay it back.
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  It's you know, because you can get money and it create a bigger problem for you.
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  So I really want you all to think about that as you think about, oh gosh, I really need money.
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  Well, you know, How much money do you need?
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  How fast can you turn that loan into revenue is is is your key thing?
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  You should never borrow money that you don't know how you're gonna turn into more money.
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  And and when you decide that you want to get a business loan, let's let's just say you You've
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  made the decision.
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  You know, I've been in business for at least 2 years.
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  I have positive cash flow, but we're having constant cash flow problems.
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  I'm gonna go get a business loan.
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  Try your bank first.
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  Your bank will actually have the lowest interest rate you could possibly get.
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  But now let's be clear.
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  8000 loans are turned down every day in America for small businesses.
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  So if you can get a bank loan That's the best loan for you to get, but you might not get 1.
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  So let's say you apply for a bank loan and you get turned out, what do you do?
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  Well, There's all of these organizations called CDFI's, which are community development
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  financing institutions, and they are nonprofit organizations typically that are in your
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  community that also do business loans.
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  So I am based in the Philadelphia market, So we have lots of different organizations here who,
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  I I can think of 6 or 7 off the top of my head that do business loans that are not banks They
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  are, you know, community development organizations.
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  They are non profit organizations that might have an SBA grant to do loans.
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  So there's all kinds of organizations.
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  You really just wanna look online and see what's available in your community.
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  Now you gotta be ready before you go apply for anybody's loan.
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  So what do I mean by rate?
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  Well, number 1, you have to have a a current business plan.
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  You can't just walk up to somebody and say, hey.
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  I'm running a business.
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  Could use a few dollars.
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  Can you loan us 20, 25,000 You need to have a plan.
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  You need to tell people what's going on in your business, who your customers are, how you
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  serve, how you, you know, how you're gonna turn this thing into money.
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  The next thing you gotta know is what your credit score is.
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  So in when you're approaching a bank, they want you to be 77.50 or higher.
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  If you're approaching a CDFI, usually their terms can be a little bit more relaxed, but you
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  still have to have a credit score of at least 6 20.
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  But here's some other things you gotta have.
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  You gotta have up to date taxes, right, because they're gonna ask you for 2 years of personal
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  taxes 2 years of business taxes.
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  So you can't have not filed your taxes for 4 years and be trying to go get a business loan.
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  It's not gonna work like that.
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  So you wanna make sure that your credit is right and that your paperwork is tight and that
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  you have a current business plan.
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  Really, really important.
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  You also should have a little media kit about yourself.
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  Like, you know, had your business won any awards?
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  Have you been featured on you know, TV or the newspaper or something like that, anything you
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  can show that that gives you credibility is important.
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  When you're putting together a loan package to submit to an organization or to your bank.
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  And, again, you wanna make sure no matter what you pull together, that you develop, that you
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  map out how you're gonna use this money to make money and just understand that when it comes to
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  banks or a CDFI, no one's gonna loan you more than about 10 to 15 percent of your gross
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  revenue.
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  So if your gross revenue is $500,000, That means you possibly can borrow 50 to $75,000,
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  but that's it.
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  So if your revenue is lower than that, know that you're gonna get lower than that.
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  So, typically, CDFI's tend to do anywhere from 10 to $35,000.
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  If it's a micro loan program, there are organizations that do bigger loans that might
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  do, you know, a 100 to $250,000 loans.
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  You know, so there's lots of different ways this can account.
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  I mean, if you're trying to buy a building, you might be able to get an SBA 7j loan and be
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  clear.
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  Let me talk about the SBA for a minute.
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  The SBA does guarantees for loans.
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  The SBA does not make loans.
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  You still have to have a banking partner before you go to get a loan.
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  So the SBA will come in with their guarantee, but you still are gonna end up at a bank.
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  And so understand that there's a there's a a symbiotic relationship between the SBA and
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  banks.
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  The other thing you wanna know is If you are gonna borrow money, you wanna understand when
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  your payments are due, are they due monthly?
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  Typically, they are.
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  But, you know, if you end up taking money from a hard money lender, like, you know, cash
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  advance loan, merchant advance loan.
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  Sometimes those, payments are due daily if you're an e commerce business.
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  Or they're a bare minimum, they usually do weekly.
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  And because if they give you a monthly interest rate, they will actually raise the interest
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  rate really high, but the the Interest rate on merchant advance or hard money loans are
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  really, really high.
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  They are the loan of last resort.
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  You do not wanna do it unless you up against the wall and can't do anything else.
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  And be clear, those guys are going to be able to have access directly to your bank account.
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  They will go right into your bank account and get their money.
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  You will not have the option to pay them or not paying them.
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  They will go get the money.
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  So the thing you wanna know no matter who you're doing alone with is you wanna know, are
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  there any closing costs connected to the loan?
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  And usually hard money lender type folks, there definitely are.
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  But the cool thing is that now there's other options.
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  You know, quick bank quickbooks is doing loans.
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  American Express is doing business loans.
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  And and they tend to you know, if you're a QuickBooks customer, they know exactly how much
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  money's moving through your business.
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  So it's a very quick I mean, they can turn this money around in, like, 24, 48 hours You always
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  wanna find out if there's any penalty for paying off early.
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  So that's something that's really, really important.
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  And you just wanna make sure that you're, you know, doing this the smart way.
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  Do not borrow money that you're not really clear how you're gonna pay back.
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  Don't borrow money to pay off past debts you know, borrow money to move your business
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  forward.
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  And if you do take out a line of credit, I do wanna do a little bit of a public service
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  announcement about lines of credit.
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  You really want to make sure that if you open up a line of credit with a banking institution,
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  know that lines of credit are for temporary short term cash flow issues.
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  You want to use a line of credit and you wanna get your line of credit back to 0 within 60 to
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  90 days.
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  You use lines of credit when you're, like, waiting on a check from a customer, and you
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  gotta make payroll.
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  So you use your line.
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  And then when that check comes in, you pay your line off.
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  That's what you want to do.
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  That is how you want to be with a line of credit.
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  If you end up using your line of credit to actually operate your business, that is how
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  you're going to mess up your business banking relationship.
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  You don't wanna do that.
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  You wanna make sure that at least once or twice a year, that that balance is back down to 0.
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  And that way you start building up your credibility with your bank so that when you're
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  ready for a bank loan, they already have 2 years of great track record You've done well
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  with your line of credit.
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  You've managed it.
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  You use it.
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  You pay it off.
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  You use it.
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  You pay it off.
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  That's the best way to do it.
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  You also wanna make sure that you're praying more than the interest on your bank loan, you
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  wanna make sure that you're paying interest and principal, really, really important.
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  Now when it comes to setting up your business bank accounts.
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  I believe that you should have 3 different bank accounts.
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  And the other thing about setting up your business bank account that I wanna say too is
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  that your personal bank and your business bank should be 2 different banks.
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  You should not have your personal funds and your business funds in the same bank.
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  It's way too tempting and easy to co mingle funds, and you just don't wanna do it.
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  I also believe in using third party credit cards, I don't like using credit cards issued
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  from the same bank that you use.
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  So I would prefer that you, you know, get a small business credit card from another
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  institution other than where you do your operational banking because you just if
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  something ever happened, They can go in your accounts and seize the money to satisfy your
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  credit card debt.
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  And so you just don't wanna do that.
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  You wanna keep everything separate and clean.
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  For your own purposes, for IRS, all that stuff, just your bank, business bank, and personal
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  bank should not not not not be the same bank.
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  Now when it comes to setting up your banking accounts, there are 3 specific accounts.
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  I think you should obviously, you need an operating account which is how you pay all the
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  bills of your business, you should also have a money market account.
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  So let's say you have a client that pays you 50% in in advance for a contract.
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  If you are being paid that money, you shouldn't let that money sit in your operating account
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  because it's not doing anything for you.
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  So you should have a money market account where you put monies that you're gonna use for a
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  later date, or if you get a really big payment from a client and you don't want that money
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  sitting in your operating account, put that money in your money market account.
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  Money market accounts aren't interest.
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  So you definitely want to have a money market account, which which have kind of functioned
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  like your emergency savings account for your business.
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  And then you have an operating account, which is how you pay your bills.
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  But I also, you know, one of my good college classmates is Mike McCallowatts, and he wrote
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  this great book called Profit First, and he talks about having a profit account.
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  And he believes that your profit account should be in a different bank than your business bank
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  and that you should pay yourself 2 to 10% of every single check that comes into your
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  business off the top, you should have a profit account.
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  And this is above and beyond your salary that you're paying yourself.
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  This will be, you know, your money that you've earned too many of us, you know, are still not
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  even taking paychecks and stuff in your business.
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  And if your profit account was in the same bank as your operating account, you absolutely know
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  that you're robbed from yourself.
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  You are still from yourself.
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  And put that money right back in your business.
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  And you should not do that because your family needs to eat.
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  You need to pay your mortgage.
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  So you need to set up your own profit account, and it should be in a separate bank.
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  So these are just some of my money rules that I wanted to share with you guys because I just
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  think it's really important because so often people are like, where do I get money?
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  Well, there's some stuff you gotta know about money and how you need to position yourself to
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  get money from people But as always, I'm gonna leave you with an action point for the week.
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  Be honest about whether or not a loan is really what the problem is in your business?
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  Is it really that you need money, or is it that you need a different business model?
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  Know how much money you actually need.
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  And then make sure you know how you're gonna turn any loan money into revenue.
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  If you know those things, then you will be much smarter and much wiser as you per do financing
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  for your business.
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  I'm Melinda Emerson, the small biz lady, and you're listening to the small business chat
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  pockets.
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  Till next time.
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  Thank you for listening to the Small Biz Chat podcast with Melinda Emerson.
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  For more resources and small business success strategies, visit succeed as your own boss.com.
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  Subscribe to this podcast wherever you listen to the podcast and join us next Wednesday.