Jay Houston, a management consultant at the Lexington office of the Small Business Development Center, which pro-
vides one-on-one consultation to local entrepreneurs, has an interesting take on the role of banks in financing start-up businesses.
“Banks are in the business of selling money. That’s their product. Their No. 1 question to potential borrowers is, ‘How are you going to pay back my money?’” said Houston, who has 30-plus years of experience in strategic planning and marketing. Before joining the SBDC, Houston was a “serial entrepreneur,” having started and managed half a dozen successful small businesses of his own.
Having counseled many people with stars in their eyes but holes in their plans, Houston revealed an entrepreneur’s most common error: “When people look for financing, they don’t always have a detailed plan for how they’ll run their business.”
There are four criteria most bankers consider when deciding whether to make a business loan, said Houston. Lenders look at cash, credit, collateral and experience.
Banks are looking for at least 10 percent to 20 percent of your own cash — often more. The bank loan would cover the remainder of the balance. Lenders also need a good credit score. Next, the loan must be collateralized.
“That’s where a lot of small businesses get hung up,” Houston asserted. “If you don’t have many tangible assets, you might have more of a challenge in that area.”
In other words, can you cover the loan should the business fail? Are you a good risk?
Immaturity has become the No. 1 reason most small businesses fail.
“While they may have experience in their particular trade,” Houston explained, “they don’t have experience running a business.”
Pizza entrepreneur Vince Swecker of Georgetown, Ky., had zero experience operating his own business, but Houston noticed the 38-year-old Swecker seemed different than the usual novice business dreamer he sees.
“When Vince and I first met, I could tell he had a lot on the ball,” Houston said. “We meet folks with a variety of experience, and Vince looked like a highly qualified candidate.”
Swecker said he has 15 years of food experience. Many of his family members have run their own businesses through the years, and Swecker may have picked up what you might call business osmosis.
Swecker recently opened the first Extreme Pizza franchise in Kentucky. Extreme Pizza started in 1992 in San Francisco and has an extreme sports (skydiving, snowboarding, wind surfing) theme. The restaurant walls are filled with giant photos of people participating in those sports. There are 18 signature pizzas among the items on its menu.
“I decided on it because of the quality of the food,” Swecker said. “I went a long way [to California] to meet with them and to understand their concept. I spent four days there. The quality of the food is top notch. To me, that’s important. I could put out a cheap product, but I wasn’t comfortable with that.”
The restaurant, located at Hamburg Pavilion, has carry-out, delivery and a soft-seat dining room.
But before all that was possible, Swecker had to get his act together.
“Jay [Houston] helped me structure the loan package the bank needed,” Swecker said. “The Small Business Development Center took all of my information, which was a lot, and put it into one convenient package. He knew what was needed. We collected it all in one neat binder, and I had it when I walked into the bank.”
Swecker admitted he first struggled as he tried to research how to navigate the maze that is starting a business. Someone recommended the development center.
“Being a first-time business owner, no one wanted to deal with me,” he said. “No one wants to do business with you unless you can guarantee everything yourself.”
So Swecker put up about two-thirds of the needed cash for the franchise and borrowed the other third from a local bank through a Small Business Administration (SBA) loan. He said he wanted to invest as much of his own money as possible so his debt load wouldn’t be significant.
Swecker said the banker told him that because he put in so much of his own money, he would get a loan for the rest. If he had put in less, he likely would have been shut out.
Restaurants seem to be a common business entrepreneurs’ attempt, said Houston. Many people think they know food and that they can easily sell all their favorite dishes to the public. But the waters are shark-infested.
But Houston added that he believes Swecker may have an advantage in that he isn’t trying to compete with the giant fast-service pizza places that have dominated the marketplace, like Papa John’s and Pizza Hut. Extreme Pizza appears to fit more into the gourmet pizza market.
“Lexington is full of restaurants,” Houston said. “It is a challenging environment to open one, because this isn’t a friendly environment for franchises, in my opinion. Local mom-and-pops seem to do well here, if they have good management.”