creative-financing

Reading between the lines of some of my past posts, you can see hints of this topic throughout.  As the point of this blog however is to bring real world examples to you tangibly, I thought it appropriate to talk about our financial acquisition of Victory Gymnastics and the initial inventory funding for AirTrackUS.

Victory Gymnastics Academy was bought through seller financing. To sum it up, the seller is acting as the bank for you.

  1. Pros: Save on fees, save on time, ability to work-in creative repayment options.
  2. Cons: Little to no in-depth background checks on seller and buyer, risk of seller not paying their obligations leading to foreclosure, risk of buyer abandoning business/real estate because of low investment risk.

As it relates to Victory, the $ 175k deal included zero down payment 5 year repayment term with 2 $ 10k balloon payments at the 4th and 6th month.  We worked a sale price out and then my CPA back calculated a fair and IRS believable interest rate to optimize tax write offs (9% in our case).

Point blank – this deal wouldn’t have happened with traditional financing.  Put aside the fact that the seller was independently wealthy and was using the business as a tax haven.  Running it purposefully unprofitable, writing off 2 business BMW vehicles and a $ 6k business trip to Hawaii.  Don’t look so shocked, these can be easily argued and justified as legitimate expenses and – beyond that – once you get wealthy, you’ll be looking for write-offs as well.   Time itself was working against Dan and I.  Traditional lending institutions are nervous of how much and how fast Dan and I have gone.  A short recap:

  1. $ 30k small business loan to take over $ 200k small business
  2. Raised SD UNITED to ~ $ 600k in revenue
  3. Purchased $ 1.5 million dollar building
  4. Start AirTrackUS. Less than 2 years old, $ 500k in new revenue
  5. Expanding to second location through business acquisition. Doubling expenses, doubling revenue.
  6. All within 5 years.

Handling growth and success is a topic for another blog post, but it’s a legitimate concern for traditional lending institutions and will play a factor in their funding decisions.  In our case, they weren’t comfortable with how fast we’ve gone.

That said, I looked at the books, put in add backs, 3 years tax returns, payroll reports, and current income statements.  If anything went wrong, we could walk away (abandon) and the owner could step right back in. I felt comfortable with the deal and the acquisition. Deal done, new journey started.

Funding for inventory of products for AirTrackUS was done through a supplier line of credit.  Similar to consignment, they fronted us product which we would pay back as we sold mats.  Line of credit was capped at $ 25k worth of product at 12% annual interest.  In practice we went over this cap.  At our max we owed them close to $ 100k. Obviously our supplier wouldn’t have sent us product if they weren’t comfortable with our ability to move the products and grow the business here in the US.

This was an interesting creative financing solution because it allowed us to use immediate profits from selling mats to grow our business as a whole (advertising, trade show fees, travel, web development, etc.).  Again, traditional funding institutions wouldn’t have touched this business. It was less than 2 years old, we had continued suspect personal credit and student loan obligations, new business start-up with zero tangible comparables or personal experience in the area.  Generally, this was a “no” before I even finished presenting my case to the banks.  Zero consideration.

This is not an indictment or criticism of traditional lending.  They are right to be nervous and conservative.  That said, as the entrepreneur there are still ways to achieve your dreams and build your empire. And this is the heart of this post.

  1. Traditional Private Business Loan
  2. SBA Loan (504 and 7a), Micro-Loans
  3. Friends and Family
  4. Angel Investor, Wealthy Benefactor
  5. Credit Cards
  6. Crowdfunding
  7. Personal Loans from 401k and savings
  8. Fundraising
  9. Partnering, Profit-Sharing
  10. Local, State, Federal Grants
  11. Negotiating Terms
  12. Consignment, Manufacturer/Supplier Line of Credit
  13. Invoice Factoring
  14. Trade, Barter, Exchange of Service
  15. And on and on and on

There are a million ways to find the money and resources needed to start and grow your business.   Generally these opportunities present themselves through tenaciousness/persistence and a large amount of creativity.  Closing 2015, 6 months of Victory and the 2nd year of AirTrackUS grossed us ~ $ 1.2 million in new revenue with zero initial investment in either.

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