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$0 to $1 Million as a One-Person Business, Is It Possible?

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one person business featured
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Usually, when people think about a business, they think of an organization that employs many people. Not every business is like that, though.

In fact, many small businesses are one-person operations. The Census calls them “nonemployer” businesses and collects a lot of information about them.

Maybe you have an entrepreneurial streak, but don’t work well with others? Well, every business has to deal with customers in one manner or another. But, if you prefer to work alone as much as possible, then it might surprise you how successful a company-of-one can be.

census nonemployer business screenshot
Credit: census.gov

Does working with other people stress you out?

A one-person business is pretty self-explanatory. Like anything, though, operating a one-person business has its ups and downs. Knowing what to expect will help you be prepared if you decide that being a “solopreneur” is right for you.

What is a one-person company?

Read how the Cambridge Dictionary defines a one-person business.

A one-person business is exactly what it sounds like – it’s a business that consists of only one employee. This employee is the owner and has responsibility for all of the business’s assets and liabilities. They also receive all of the revenue and pay all of the expenses. That means, of course, that they also keep all of the net profit.

A one-person business is sometimes, more technically, known as a nonemployer business.

So, why might someone want to operate a one-person business?

Well, we all have different personalities. And, we all do our best work under different circumstances.

Some people might thrive in an environment where they hire employees and work with a multitude of different customers and suppliers. They do their best when working with other people.

Other people, however, interacting with others makes them feel stifled. The more they have to deal with other people’s issues the less energy there is for value creation.

Running a one-person business does not mean that you do everything yourself. You can, for instance, outsource some of your responsibilities. Thus freeing yourself up for activities that are more value-added. In cases like this, the relationship is more customer-supplier than employee-employer.

When you decide to move on from your one-person business, you could sell it to someone else and they could continue to operate it as such. Or, they could elect to hire employees and take the business in a different direction. If you decide not to sell, the one-person business might cease to exist once you’ve decided to move on.

sba nonemployer business stats
Credit: sba.gov

Pros and cons of being a one-person show

Here, the New Hope Network weighs in on the pros and cons of a one person company.

Pros include:

  • Only answering to yourself
  • Flexible work hours
  • Keeping all profits
  • The status from achieving everything on your own
  • Following your own vision
    • Not needing to compromise
    • No “red tape”

Cons include:

  • Being overwhelmed
  • Difficulty in luring investors
    • A less professional image
  • Potential loneliness
  • Being “too close” to your business for appropriate perspective
    • No reality checks
    • Wasting time (I can attest to this!)
  • Assuming all the risk

There are many advantages to owning and running a one-person business. For starters, it is simple to launch. It’s also easy to terminate. With a one-person business, you can pack up and move on, the day you decide you’ve had enough (short of fulfilling any contractual obligations).

Not hiring employees means never having to worry if that expense is earning an adequate return. You never have to worry if it’s the right time to hire.

There’s no worrying about how decisions will be received by employees or the 2nd/3rd order effects of those decisions.

It’s not all upside of course. There’s a reason why many businesses choose to hire employees.

One disadvantage of a one-person business is that succession might be an issue. As I mentioned earlier, many times, the business dies once the owner is through with it.

By avoiding partners, the one-person business owner assumes responsibility for all liabilities. They are also responsible for raising all of the necessary capital.

The biggest disadvantages are, however, that there isn’t necessarily anyone else available to complement the owner’s strengths and weaknesses. Though, this disadvantage could potentially be worked around by utilizing contractors or freelancers. It’s this disadvantage that can make it challenging to scale the business up and to reach its full potential.

So, if you’re considering a one-person business, make sure that you choose a scalable business model.

Best one-person business ideas

Read more about Business Alligators list of types of businesses that consist of only one person.

If you’re interested in running a one-person business, below, are some industries you might consider. What makes each option appealing is also listed.

  1. Finance and insurance
    1. Recurring revenue
  2. Retail
    1. The most popular industry in the $2.5 – $4.99 million annual revenue tier
  3. Real estate
    1. Lots of supply
  4. Designing
    1. Ability to exercise creativity
  5. Currency mining
    1. Potentially very lucrative
  6. E-commerce
    1. Availability of tools to help with the technical aspect & ability to sell worldwide
  7. Fast food (food trucks)
    1. Consistent demand
  8. Coaching/teaching
    1. A wide variety of markets
  9. Mobile laundry
    1. A growing industry
  10. Child care
    1. Consistent demand

While one-person businesses do have their limitations – they can also be very successful. In fact, there are many that top $1 million in annual revenue. Keep in mind, of course, that $1 million in annual revenue does not mean anything close to that in net profit. I think it is safe to say, however, that this level of sales is enough to put a one-person business in a position for success.

As tools for automation become more readily available, the prevalence of one-person businesses will hopefully continue to grow.

Here are some examples of one-person businesses with $1 million or more in annual revenue (Source).

The Babysitting Company was started in a dorm room and reached $1 million as a one-person business. It looks like the founder has since hired some help to handle growth.

Tools4Wisdom got its start by selling planners on Amazon. The founder grew to $2 million in revenue before hiring the company’s first employee.

Bear Mattress is another one-person business that hit $2 million in revenue. They too have since decided to hire help.

As you can see, there is something of a consistent theme with the above examples – each has decided to hire employees after achieving a remarkable amount of success as a one-person business. It could be that once they got a taste of success they decided that remaining solo wasn’t as important as it once was.

How to start a business by yourself?

People who launch one-person businesses tend to follow a similar path. It’s not for everyone, but if you’re trying to get a one-person business off the ground, here’s a rough plan to get started:

  1. Start your business while working full-time
  2. Choose a business structure
    1. Preferably LLC or corporation
  3. Focus on the most important tasks

Is it possible to start a business while working 9-5?

This Reddit post has some ideas on setting up a one-person business while employed. Here’s a summary of some of the advice given:

User jumbotron198 advises: work just hard enough to not get fired at your full-time job. Make sure you meet your responsibilities to your employer. But, as long as you’re doing that, you shouldn’t feel guilty about taking control of your own professional destiny.

User rsimmonds has a few bullet points to keep in mind:

  • Stay engaged
    • If your side hustle becomes a “chore,” you’ll run out of energy
  • Prioritize and make a schedule
  • Beware of “time sucks”
    • Activities that add little value but prevent you from growing your side business
  • Don’t feel guilty about taking control of your financial and professional situation

Finally, user binaryOne advises you to do what you can while on company time and utilize as much time as you can outside of your full-time job. Keep in mind that you won’t (can’t) keep up this pace forever. Take action and sort out the details later.

Starting your one-person business on the side can ease some of the potential financial stress. Plus it allows you to “work out some of the kinks” while still bringing in income.

Of course, starting your business as a side hustle also means that you’ll probably only be able to commit part of your time and effort to it. If you’re sitting on a business with a lot of potential, you could simply be delaying that glorious day when you can quit your job and work full-time on something you actually care about.

What’s the best business structure for a bootstrapping one-person business?

This Quora post offers some advice on the best legal structure for your small side business.

User Sam Mollaei suggests structuring your business as an LLC, or an S/C corporation. As a business lawyer he states how:

  • An LLC will help protect your personal assets and taxes will pass through the LLC to you personally
  • A C corporation will create an entirely separate legal entity from you, the owner
    • You and the corporation will each be taxed separately
  • An S corporation is similar to a C corp, but the taxes also pass through to you

There’s very little downside to structuring your one-person business as an LLC or corporation. Operating as a sole proprietorship comingles your finances with that of the business and puts your dream at risk due to liability (Source). My only advice would be to wait to form your LLC or corporation until you start earning revenue. There’s no point, that I’m aware of, in forming it sooner.

Productivity tips for solopreneurs

This site offers some suggestions on ramping up your side business while juggling a full-time job.

  1. Work on your side hustle when you are most productive
    1. Figuring out when that is might take some trial and error
  2. Use your time wisely
    1. Focus on tasks that are important and/or urgent
  3. Plan your days and weeks in advance
  4. Group similar tasks together
  5. Use a timer to stay focused
  6. Take notes
    1. To remember ideas and to sort out your thoughts
  7. Eliminate distractions

When you’re going solo, everything is on your shoulders and that can get a little overwhelming. If you’re starting your one-person business on the side, you have that much less time to handle it all.

Try to focus on those tasks that add value (i.e. revenue). It can be tempting to work on less important, or vanity projects if you are earning an income from a full-time job. The link above also recommends:

  • Setting goals
    • Short and long-term
  • Blocking off time for critical tasks
  • Staying organized

Starting a side business and turning it into a successful one-person business is going to take discipline. My only caution would be to avoid becoming your own tyrant. Don’t become the annoying coworker or manager that you’re trying to get away from.

Effective Small Business Strategies for Hiring Great Employees – Curation

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Curation posts were created to address small businesses’ biggest problems by gathering some of the best resources from around the web and summarizing them.

This month’s problem is – Hiring!

Quickly scan the most important points and click the link for a specific article if you’d like to learn more.

Curation posts are published once per month. So, be sure to check back!

Topic 1 – How to hire an employee for your small business

When your small business grows to the point that you can’t handle everything by yourself – it’s time to hire. Hiring is a somewhat complicated process, especially if you’ve never done it before. The information below will prepare you for hiring your first employee and every other employee after that.

Hiring employees for your small business: Tips before your first payroll

Find out more about how small businesses hire employees at Monster

Step one is to write a quality job description and to prepare interview questions. Get feedback from an HR expert, if you can. Additionally, consider drafting a simple employee manual.

Next, check into insurance that will provide protection against bad hiring. Background checks are advisable too.

Make sure you’re prepared for payroll taxes. The government will expect you to collect these taxes from the get-go.

Here’s a checklist of things to do to prepare to collect payroll taxes:

  1. Have the employee complete a W-4 form
  2. Have the employee complete an I-9 form
    1. Employment eligibility
  3. Start paying unemployment and worker’s comp insurance
  4. Make payroll tax deposits
  5. File with Federal tax authorities
    1. Also state and local, if necessary

Consider using a payroll service. They will handle all payroll taxes and filings. They will also help ensure that all wage and hour laws are obeyed.

Also, think about having an attorney draft an employment contract if you want to protect trade secrets or have employees sign non-disclosure agreements.

Educate yourself on Federal, state, and local employment laws. Laws can vary widely from locale to locale. Here’s a list of links to learn more:

How to Hire Employees in 7 Steps

Learn more about hiring someone as an employee at Fit Small Business

  1. Create a job description
  2. Handle the administrative necessary administrative tasks
    1. Set up a tax ID
    2. Register business
    3. Obtain payroll software
    4. Find a workers comp plan
  3. Settle on pay, benefits, and perks for each position
    1. Use online job sites to get an idea of market rates
  4. Post your job opening
    1. Highlight your company culture
    2. Look into free applicant tracking systems (ATS)
    3. Ask your best employees for referrals, if applicable
    4. Consider hiring a recruiter
      1. Costly
  5. Review resumes and interview
    1. Understand anti-discrimination laws
  6. Make a job offer
    1. Be willing to negotiate
  7. Prepare for the employee’s first day
    1. Completing new hire paperwork
    2. Training, if necessary

Retaining quality employees helps to save time, save money, and reduce risk. Providing feedback, ongoing training, and engagement/appreciation/motivation all help with keeping quality employees satisfied and on your payroll.

Small Business Hiring: How to Hire Your First Employee

Read more about how to start hiring your first employee at Trusted Employees

Before taking the time to hire – determine what will fit in your small business budget. Use a job listing site to get an idea of the market salary and benefits. Consider part-time, temporary, or contract hires if you can’t afford a full-time employee.

Create a job description and post it online. Utilize your network too. If you don’t have the time, but do have the money – use a recruiter.

Interview your top candidates. Set up a consistent process for interviewing. This allows you to evaluate candidates fairly. Interview questions fall into two basic groups:

  1. Applicant experience, skills, and qualifications
  2. Applicant character and goals

Obviously, steer clear of questions related to race, gender, religion, etc.

Also, have questions prepared for references – if you will be checking them.

Prepare a formal job offer letter for the candidate you choose. Specify the wages, benefits, and conditions for employment in this letter.

If you’re running a background check on the new hire, let them know. Give the applicant a copy of the background check if you decide not to hire them based on what you learn.

When you do make your first hire:

  1. Make sure you have an employer identification number (EIN)
  2. Set up tax records
  3. Get insurance for the employee
  4. Print off any posters that are required by law

Topic 2 – The most beneficial time to make that first hire

Hiring, like any other expenses, is an investment in your company. Like all investments – you want a good return. Knowing when your small business should hire employees is tough. Especially if it’s the first employee. The information below will help you know when the time is right to make a hire.

When To Hire New Employees: Smart Tips for Growing Your Small Business

Find out when you should hire a new employee from FreshBooks

Hiring too soon is a drain on cash flow. Hiring too late is a drain on resources.

The right time to hire is when there’s enough work for the employee and when your small business has the financial capacity to manage the additional costs. Don’t forget the “hidden” costs – insurance, training, etc.

Hiring can take 10 weeks or more, so plan ahead!

Here are some factors to consider before hiring:

  1. Is your business growing?
  2. Is there an opportunity to increase revenue on the horizon?
  3. Have you had to decline work you would have otherwise taken?
    1. Causing revenue to flatten?
  4. Are your current employees (you?) at or near capacity?
    1. Is overtime increasing?
  5. Is your workforce lacking the necessary skills?
  6. Is employee morale decreasing?
  7. Is customer service declining?
  8. Are skilled employees handling menial tasks?

Should You Hire A Full-Time Employee?

Read about why it’s better to have full-time employees at Kabbage

Some of the pros of hiring full-time (vs part-time or contractors) are:

  • More engagement and production
  • A bigger and better pool of candidates
  • More synergy among employees

Some of the cons of hiring full-time are:

  • The cost of salary and benefits
  • A lack of scheduling flexibility

Hiring Your First Employee?

Find out what to do when hiring your first employee from Just Business

There are some important questions to ask yourself before you hire your first employee.

First, how volatile is business in general and cash flow in particular? Having to let someone go when things get slow is inefficient. Consider temporary employees or contractors if you don’t have enough work to keep an employee consistently busy.

Second, is the employee necessary to grow the business? Would they have essential skills you don’t? Or, can they critical tasks you don’t have time for?

Third, will your finances support the hiring of an employee? Employees are expensive. The costs (time and money) start rolling in before you even read your first application/resume. Additionally, wages only make up a portion of the total costs. Not having enough cash to make payroll can be catastrophic.

Finally, are you prepared to deal with the “details?” There are many employment laws that you will have to familiarize yourself with. Additionally, you’ll need to document and retain records pertaining to time worked and wages paid. Then, there’s also a plethora of safety regulations that will need to be followed.

What advice would you give to a small business owner about hiring their first employees?

Learn more about what Quora users would do when hiring their first employee.

User Aleksandr Volodarsky advised to only hire for routine tasks, to begin with. This frees you up, as the entrepreneur, to focus on the most important tasks – increasing sales and revenue.

He also recommends that you create a guide for the new hire to refer to. Since these tasks are routine, this should be relatively simple and will help ensure that the new hire does things the way you want.

Finally, he suggests that you start off by hiring a freelancer. This will help you fine-tune the job requirements and will keep costs manageable until you’re certain that you need a full-time employee.

User Jamie Van Cuyk emphasizes preparation along every step of the hiring process. This includes:

  • Preparing an exact job description
  • Researching where your ideal candidate might be looking for a job
  • Clarifying what skills you’re looking for on a resume/application
  • Preparing questions to ask ALL interviewees
  • Preparing for a new hire’s first day and onboarding

Finally, Mike Schoultz looks at things from a slightly different perspective. He answers the question by stating what he looks for in terms of employee qualities. These qualities include:

  • Likeability and empathy
    • Their ability to get along with a team
  • Initiative and leadership
    • Acting like an owner
  • Flexibility
    • The ability to adapt
  • Humility
    • No huge egos

Awful Marketing Results? Review These 5 Main Activities

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Every small business is concerned with marketing. Marketing activities are what drive sales. Without sales, no business is going to keep its doors open for long.

There are five general categories for marketing activities that every small business undertakes. These five primary marketing activity categories include:

  1. Market research
  2. Product and service selection
  3. Pricing
  4. Placement
  5. Promotion

Each product and service a small business sells might require different activities within these categories. The breadth and depth of the marketing activities might vary too.

Becoming proficient at each of these marketing activities will allow you to better understand your customers and solve their problems in a quick and efficient manner. A manner that makes them feel good about doing business with you.

Gather, analyze, and interpret info about your market

Market research can be time-intensive and complicated. But, it is one of those activities where even a little bit of effort is very beneficial. Market research lays the groundwork for the other marketing activities. It helps to direct your efforts in an efficient manner.

Different products and services probably serve different markets. So, you’ll want to understand the demand, market size, location, and market saturation for each of your products and services. Additionally, you’ll want to have a firm grasp on the competition and how you’ll set your small business apart.

People are diverse. Your product or service can’t be everything to everyone. You’ve got to divide people into categories so that you can better suit their needs. Categories such as gender, race, marital status, children, occupation, income, and education. Market research will help you decide which of these categories most of your customers will come from.

Armed with this powerful information, you’ll put your small business in a better position for success. Without market research, you’re left to guess about where to direct your marketing efforts. Therefore, you’ll likely waste time and money trying to reach your best customers.

https://www.youtube.com/watch?v=ReeO5P58BPo

Choose products and services based on market demand

Thorough market research helps you to refine your product or service. It will help you create the product or service that best meets customer needs. Additionally, critiquing your competitors is a critical part of market research. Deeply analyzing competitors’ products and services will help you to create something that is unique and fulfills a niche.

No matter what your product or service is, you will have competition. You can be certain of that. Even if there isn’t a product or service exactly like yours, you will still have to convince customers why yours is better than a substitute.

Offering the right products and services will make the rest of your marketing activities easier. Use what you learned from market research to create products and services that your customers are excited about. Doing so will make them that much easier to sell.

Assign value to the benefits you’re providing customers

marketing tutor pricing strategies
Credit marketingtutor.net

Pricing can be somewhat complicated. It requires analyzing you and your competitors’ products and services from many different angles. There is no perfect answer when it comes to pricing either. You probably wouldn’t know the ideal price if you saw it.

I recommend reviewing the SpreadsheetsForBusiness.com Pricing Strategies for Startups video and post. There, you can also download the Price Sensitivity Meter. With the Price Sensitivity Meter, you look at a range of prices and make judgments regarding:

  • When customers will question quality
  • When customers would consider the price a bargain
  • When customers would think the product or service is getting expensive
  • When customers would consider the product or service too expensive

Of course, you can’t talk about pricing without considering costs. But, be sure not to fall into the trap of pricing strictly off of costs. There are a lot of other factors to take into consideration.

However, unless it’s done with a specific purpose in mind, make sure you are not pricing below your costs either. That’s not a strategy that can be maintained for very long.

Get products and services into customers’ hands

marketing activity place
Credit: 365 Careers

Placement has to do with how a small business delivers products and services to its customers. Not every company deals directly with the end-user. Sometimes, intermediaries such as distributors, wholesalers, or retailers are utilized.

If you are not dealing directly with the end-user, then you are, in essence, partnering with another business in order to get your products and services sold. Partnering with another business can allow you to scale up your marketing activities. But, the obvious downfall is that you lose a certain amount of control. In fact, your partner might also be partnering with your competition.

Just as with product (service) selection and pricing, you’ll want to keep your end-user in mind. Put yourself in that customer’s shoes and think about how your placement and distribution decisions affect the value that they receive.

Set your business apart from the competition

With a firm understanding of the other four marketing activities, you should be prepared to stand out from the competition with your promotional activities.

Promotion includes advertising, of course. But, it also includes sales, incentives, and any other direct contact you have with your customers.

Keep that in mind – anytime you are dealing directly with leads, prospects, or the public in general, you are engaging in promotional activities.

https://www.youtube.com/watch?v=Mco8vBAwOmA

Marketing can have up to a 275% ROI

Source

Any action your business takes to boost sales (and revenue) is a marketing activity. Having a great product or service is something to be proud of. However, if you don’t make prospects, leads, and existing customers aware of them, then it’s all for nothing.

The general categories listed above can be broken down into more specific activities. Marketing is a multi-faceted and complex subject. Most people aren’t an expert at all things marketing. Get help where you need it and be sure to review each activity periodically to make sure you’re getting the most out of your marketing efforts.

7 Ways To Think About Your Restaurant Inventory – Cut Losses [VIDEO]

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How do restaurants keep track of inventory? Video summary

Inventory is a pain. Especially in a restaurant where ingredients are constantly being consumed.

Don’t fight against the nature of your business. Schedule inventory counts when it will be easiest for you and your employees. For instance, during downtime and when inventory is at a minimum.

Whatever you do, don’t skip this important task! Keeping an accurate inventory is key for meeting customer demand and maximizing your restaurant’s profit!

Make sure that inventory counts are promptly updated in your inventory software or spreadsheets. Accounting software is useless if it doesn’t match reality. So, make sure your software is up-to-date. SpreadsheetsForBusiness.com, by the way, has a useful inventory control spreadsheet that you can download along with six other handy worksheets.

Speaking of software, utilize technology as much as you can. You’re busy. Take advantage of any reasonably priced help you can get.

Keeping track of stock and planning purchases

Restaurant managers and owners have to juggle a lot of different responsibilities. They also have to be knowledgeable in a number of different areas.

Scheduling, ordering, prepping, costing, pricing, setting a menu, and, of course, inventory control are just a few of those responsibilities. By the way, if you’d like help with those responsibilities, check out my Why Spreadsheets Are Your Restaurant’s Best Friend video/post/templates.

If any of those responsibilities are cumbersome or are disproportionately time-consuming, it might be tempting to stop doing them. Or at to least stop doing them correctly.

While they’re all important tasks, inventory control might seem like one of them that you can skimp on. Maybe it’s too much of a pain in the butt? Or, maybe it seems so simple that you handle it halfheartedly.

If that’s the case, hopefully, this video and post will help you identify some best practices to tighten up your inventory control to help your restaurant’s bottom line. 

Implement smart restaurant inventory policies

Organization will make your restaurant inventory control much, much easier. So, if you are a naturally organized person, then you have an advantage here. If not, I would advise you to do your best to implement some of these organizational principles. You’ll be glad you did. 

One way you can organize is by breaking your restaurant up into different inventory areas. For instance:

  • Coolers
  • Dry storage
  • Preparation area
  • Bar 
  • And so on…

These different areas can serve as categories if you decide to utilize the Why Spreadsheets Are Your Restaurant’s Best Friend inventory control tool.

restaurant inventory control worksheet
Click to enlarge

Also, you hired employees so that you could accomplish more than you could by yourself. Don’t hesitate to use these assets when it comes to inventory control. Three trusted people handling inventory control will likely make the job more than three times easier.

Whatever accounting costing method you decide to use for your restaurant inventory is up to you. But, when it comes to actually pulling and consuming inventory, I would strongly recommend that you use the First In, First Out of (FIFO) method.  This helps ensure that spoilage is minimized.

Consolidate inventory as you go. This will save space, leave room for new deliveries, and reduce the clutter at your restaurant. Doing so, along with disposing of expired inventory, should make this teeth-grinding task quicker and easier.

Count and record restaurant inventory

“How hard can it be to count?” you might be thinking. “I run a successful restaurant, I’m no idiot.” And, right you are.

You know how to count. But, have you ever considered when to count? There are two answers to that question.

The first thing to decide is how often to count. Daily? Weekly? Monthly? I wouldn’t suggest that you do it any less frequently than monthly. Things are liable to get out of hand if you wait that long. How often to count depends, in large part, on the amount of inventory you carry. If you carry a lot, then you should probably count more often.

One thing to consider is when you receive most of your deliveries. Ideally, you’ll be counting shortly before that, so that you can minimize the amount of counting you have to do.

The other thing to consider when deciding when to count inventory is what part of the day should you do it. That answer is easier. Counting inventory before or after operating hours will save you a lot of hassle.

Finally, make sure that you count using consistent units of measure (UOM). You don’t want to count something in gallons one week and ounces the next.  Also, no matter how often you count, no matter what UOM you use, make sure to update your quantities on hand in your software. Even if that software is just a spreadsheet.

Look up restaurant inventory costs

Now that you know your inventory quantities, it’s time to address the other side of the inventory value equation – the unit cost.

Food costs are very volatile. Plus, ingredient usage can be hard to track. Therefore, it’s probably best to use your last purchase order cost. This should be pretty accurate if you’re counting your inventory on a fairly frequent basis.

Using your last purchase order cost will help ensure that your inventory value and cost of goods sold (COGS) is accurate.

Looking up costs after every inventory count will also help you stay on top of changes. You’ll have a better intuition about what’s eating into your profit or helping your bottom line from an ingredient standpoint.

I know you didn’t get into the restaurant business to count and to look up costs. Again, utilize help from your staff where you can. COGS is a huge driver of restaurant profitability, so it pays to manage this stuff carefully. 

Cost and usage of every ingredient

Staying on top of your food costs will help you make sure that you’re pricing appropriately and staying profitable. Speaking of costing and pricing, again I would suggest you check out my Why Spreadsheets Are Your Restaurant’s Best Friend templates. Specifically, the Food Costing worksheet. On it, you can scale recipes up and down and get a suggested price based on the cost and your desired markup percentage.

restaurant food costing and pricing worksheet

Understanding your costs and the profitability of every dish you serve will help you make smarter menu decisions. You’ll know what to promote more and what to drop off your menu.

You certainly don’t have to use my worksheet, but utilize technology to the fullest extent practical. You’re busy as it is, so take every advantage you can get to work more efficiently and effectively.

Finally, staying on top of inventory quantities, costs, and usage will help you be proactive in catching instances of theft and loss. If you’re not managing these things, then you can probably see how theft and loss would easily slip through the cracks. 

Keep an eye on restaurant inventory

Excess inventory is a problem for every business. But, restaurants in particular. Over-ordering inventory takes up valuable space and it’s a waste of money. Even if the inventory gets used in a restaurant before it expires, it’s still like sitting money on a shelf. Money that you could be used to earn an ROI elsewhere.

Money that is tied up in excess inventory could be used to buy ingredients that you are consistently running out of and are losing sales on. Or, it could be used to hire more staff. Staff that could help you count inventory!

Taking consistent inventory counts and tracking usage will also help pinpoint and deter theft. Unfortunately, dealing with potential theft is just a part of running a restaurant. Everybody likes food and a lot of people like alcohol. Therefore the risk of theft runs higher for restaurants than it might for other businesses.

POS software and other technology can help

Tracking inventory is nobody’s idea of fun. But, by staying on top of it you can avoid inventory catastrophes which everyone agrees are downright painful.

So, get all the practical help you can by utilizing software or spreadsheets. Be sure to do your homework on any software you’re looking to pay for and get the training that you and your staff need to use it effectively. In many cases, especially if you’re a smaller restaurant, relatively simple spreadsheets might make more sense than specialized software. They take a little bit to set up, and they’re not foolproof. But, they are almost 100% customizable.

Restaurants, like all other businesses, strive to get as many benefits as they can for the costs they incur. Remember, though, that cost can also be measured in time. Keep that in mind when considering software tools to help you work more efficiently and effectively.

Questions about restaurant inventory

How can I manage all my inventory in my restaurant?

The fundamentals of managing inventory in a restaurant include consistent inventory counts, keeping track of costs, and understanding usage. Get buy-in from your employees to help with these tasks and utilize software tools to manage your restaurant inventory efficiently and effectively.

How much food inventory is lost due to spoilage at the average restaurant?

It’s estimated that 4% to 10% of food in restaurants is lost to spoilage, theft, or waste. With food cost making up approximately 30% of a restaurant’s total cost, excess waste can really hurt your bottom line. Therefore, it makes sense to learn about and implement policies regarding smart inventory management.

What are the best mobile and tablet apps for restaurant inventory?

One app you might try out is called Fishbowl. Fishbowl is a software tool built to connect to QuickBooks Online. This is nice because your inventory control will tie directly in with your accounting software.

Speaking of QuickBooks Online, I’ve written several posts (and made several videos) on the subject.

To be clear, I have not tried Fishbowl. I cannot speak, personally, to its effectiveness. However, it did appear to be well-reviewed. So, I think it would be worth checking out if you’re looking for a mobile or tablet app besides spreadsheets.

How Do I Make a Restaurant Inventory List? Avoid Wasting Money While Still Meeting Demand [VIDEO]

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Download the restaurant spreadsheets

What is considered inventory for a restaurant? Video summary

Inventory information is only useful if it contains critical data. Having access to your restaurant’s most important information will help you make smart decisions for your restaurant.

Actual inventory levels must be consistently physically counted and compared to amounts listed in the software. Corrections in the software must be made if there is a discrepancy.

Many restaurant software tools will help to keep track of inventory. However, if they don’t, you can’t neglect this task. Even if they do, periodic inventory counts are still necessary.

What should a restaurant inventory list look like?

There are five fields that are critical for a restaurant inventory list.

These fields are:

  • Item
    • The name of what’s being counted
  • Unit of measure (UOM)
    • A consistent quantity that will be used for counting and costing
  • Quantity on hand (QOH)
    • How many UOM the restaurant currently owns
  • Item cost
    • Don’t count in one UOM and cost in another
  • Extended cost
    • QOH × Item cost
    • The total value of the inventory

Additionally, you can include other fields in your restaurant inventory list if appropriate. For example:

  • Category
    • Meat, vegetables, raw, prepared, etc.
  • Location
    • If you have more than one
  • Any other classification that helps you manage inventory

The restaurant inventory list

Fill out the critical fields for every item you own. If you must, it is okay to use multiple lines for the same item. The pivot table functionality of the spreadsheet can handle it.

Your restaurant’s POS (and other types of) software might be able to help with inventory management. It depends on the software functionality. Some software will track inventory usage. Your accounting software might track purchases too and may keep running inventory levels.

Not every piece of software will keep track of waste, spoilage, and other losses, however. Therefore…

Cycle counting of restaurant inventory will still always be necessary. This ensures that your inventory counts are accurate and you can meet demand and avoid waste.

Employees play an important part in inventory management. Consider giving them an incentive for accurate inventory counts. Explain to them the importance of accuracy.

When cycle counting – maintain a consistent schedule and stick to it! Inventory items with high turnover should be counted more frequently.

Finally, remember to track waste and food loss. Particularly if your software does not. During the hustle bustle of the workday, it may not be possible to accurately measure wasted quantities. Do your best to estimate them. Inventory amounts will be accurately adjusted next cycle count.

Utilize the Food Waste spreadsheet on the Why Spreadsheets Are Your Restaurant’s Best Friend workbook (download above). Also, take advantage of the other spreadsheets in the workbook including:

  • Scheduling template
  • Vendor order sheet
  • Daily prep list
  • Inventory control
  • Food/recipe costing
  • Food waste
  • Sales per day

More considerations regarding your restaurant inventory list

Only consumable items that you use to prepare food should be included in your inventory. Not every asset should be included here. Things such as flatware, cookware, glassware, etc. are not inventory.

It’s important to keep accurate records for these assets, but they are not inventory. Inventory is what you sell to your customers.

Again, make sure you’re using a consistent UOM for your inventory items. Use whatever is easiest to track. Whether it be Lbs, Gal, Oz, Cans, Cases, Flats, whatever – just stay consistent. Doing so will ensure that costly errors in counts and valuation aren’t made.

Food costs are rapidly changing. So what cost should you use?

Your POS or accounting system might track costs for you. If so, great. If not, it might make sense to assign a standard (expected) or average cost to inventory items.

No matter what inventory cost you use, make sure you’re relieving inventory on a First In, First Out (FIFO) basis. E.g. use your oldest inventory first, assuming it’s fit for consumption, of course. No other industry has to wrestle with the issue of spoilage more than the restaurant industry. So, do what you can to avoid needless waste of inventory and dollars.

Again, at the risk of beating a dead horse, make sure your costs reflect your UOM.

Finally, one of the primary benefits of managing your restaurant inventory is that you can measure inventory days on hand. In order to do so, you must keep track of inventory usage on a daily basis.

Inventory days on hand = inventory on hand ÷ average daily usage. Assuming that you are meeting all of your customer’s demand (not running out of stock) then the lower your inventory days on hand, the better.

Questions about How Do I Make a Restaurant Inventory List?

What challenges do restaurants have with managing inventory?

Spoilage is one inventory problem that the restaurant industry is particularly prone to. Many inventory items, by necessity, have an extremely short shelf life.

Accountability is another. With so many different individuals handling and recording inventory, it can be difficult to ensure that QOH in your software matches reality.

Finally, running out of inventory can hurt customer service for a restaurant more than it can other industries. While other businesses can put an item on backorder for a customer – restaurants can not.

These are just a few. There are many more unique challenges that restaurants face in managing inventory.

How does one manage quality control and inventory control smartly in a restaurant for an owner who lives in another city?

Most importantly, it is critical to find employees that can be trusted to manage inventory smartly. Also, while you want every employee to use best practices when it comes to inventory management, you’ll probably want to have one trusted individual who will have ultimate accountability.

Which is the best software for inventory control in a restaurant?

There are a lot of options out there. However, a piece of software called Restaurant 365 seems to be pretty well regarded. I’ve never used it myself. So, I can’t attest to its quality. In my brief searching, though, I never saw any negative feedback. Pricing will run from $250 to more than $450 per month per location.

Spreadsheets are also often recommended. They take some work to get set up, but one major benefit is the ability to customize them to your needs. Feel free to download the inventory control spreadsheet above and check out the Why Spreadsheets Are Your Restaurant’s Best Friend post and video.

“How Do I Write a Marketing Business Plan?” Breaking It Down

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“How do I write a marketing plan?” Start by looking internally at your unique selling proposition and your pricing. With that foundation, you can be proactive and confident in your advertising, sales, and distribution strategy. All the while, you’ll want to be mindful of what the competition is doing so that you can copy what works and avoid what doesn’t.

An annual marketing plan and the marketing section of your business plan are essentially the same things. They’re both a plan of action for making more sales and bringing in more revenue. The latter is written when you’re getting ready to launch your business. The former can be written at any time; but, ideally, would be reviewed and revised at least annually.

The first thing to address in your marketing plan is your unique selling proposition (USP). This is the foundation of all of your other marketing.

Next, the focus will turn to pricing. Pricing has an enormous effect on revenue. In fact, if your small business’s pricing is on point, that can probably make up for other shortcomings in your marketing plan.

With those issues addressed, you can now turn your focus to other activities that will directly impact customers. Specifically, your sales/distribution and advertising/promotion. Your business’s sales and distribution plan will involve direct contact with the customer. Conversely, your business’s advertising and promotion plan will be comprised of more indirect interactions with your prospective customers.

While working through the sections of your marketing plan, it’s critical that you refer to quality market research. When you were drafting your business plan, you probably had extensive market research handy. If you don’t have up-to-date market research at this time, I think it would be beneficial to brush up on that before writing a marketing plan.

What is a unique selling proposition (USP) in marketing

Every company has something unique about them. It might be in their products or services. Or, it could be some other aspect of their business. 

Of course, your business is no exception. My advice, when considering your unique selling proposition, is to think about what your business is good at. What’s the one thing you do better than anyone else? It can be anything, even if it’s not an activity that directly affects customers.

unique selling proposition venn
Credit: techuniverses.com

If it’s an activity that doesn’t directly affect your customers, think about the second and third-order effects of that activity. Surely, you’ll discover that activity ultimately benefits customers in one way or another. Every activity that takes place within your small business (should) revolve around your customers. After all,  they’re the ones that drive revenue. Without revenue, you wouldn’t bother doing any of those activities.

In addition to clarifying what’s unique about your company, you’ll want to revisit your products and services to solidify what benefits they provide your customers. Benefits are the reason that people buy products and services. make sure you’re not listing features during this exercise.

Customers don’t buy a saw because it can cut wood. They buy a means to get a board that’s exactly the right length. This is a good illustration of the distinction between the features and benefits

With a firm grasp on your USP and the benefits of your products and services clearly in mind, reviewing your pricing strategy should also be easier.

What are your competitors’ unique selling propositions?

Now, it’s time to think about what it is that your competitors do best. Nobody is the best at everything and everybody is the best at something. Even your less-than-stellar competitors have something that they do very well.

In a perfect world, your business would serve as much of the Total Obtainable Market as you wanted. As it stands, you’ll probably have to wrestle a share of that market from your competitors. Therefore, it pays to know what you’re up against.

Understanding your competitors’ unique selling propositions will help you with sales in particular. When leads and prospects bring up your competitors, you’ll be able to acknowledge what they do well. This will convey authenticity. You’ll also be prepared to counter with why your unique selling proposition makes your products and services a better fit for the customer.

What are pricing strategies in marketing?

Pricing is a tricky subject. Many entrepreneurs fear that if they price $.01 too high, they’ll not make any sales. Alternatively, it always nags at them that they may not be pricing high enough and therefore leaving revenue on the table.

To complicate matters, pricing is very subjective to customers. Presented with the same price, one customer might think a product or service is outrageously overpriced. Another might consider it a bargain.

I made an extensive video and a valuable spreadsheet to help small businesses solve the problem of pricing. Check that out if pricing is giving you trouble.

womens product price sensitivity meter
Click to enlarge

There is a multitude of pricing strategies that your small business can employ. Many of which can be combined together.

How much you decide to scrutinize pricing is up to you. However, I always suggest that if you’re weighing different price points common to go with the higher price. You can always improve your sales tactics and it’s easier the lower prices via a promotion than it is to raise them.

Also, though I don’t advocate for pricing strictly on the basis of costs, it is important to understand your costs so you can be certain that you’ll meet your margin goals. Therefore, this is also an excellent time to make sure your costing is accurate.

What are your competitor’s pricing strategies?

Just as with the USP, you’ll want to reflect upon how your competitors price their products and services.

Think about how their pricing lines up with their USP. Does it make sense? Do you have any competitors that always insist on competing on price? Yes, that can be frustrating. But it also likely means that they don’t have much of a marketing plan.

In turn, maybe you can further distinguish your business while they fall back on the only trick they know – lowering their prices. As a result, your business will strengthen and theirs will weaken.

How will advertising be used in your marketing plan?

Your USP will give your advertising focus. It allows you to deliver a consistent message to prospective customers. The number of avenues that you can use for marketing is almost limitless.

If you’ve been in business for any amount of time, then you probably have some experience with advertising. This is a good time to “play Battleship” – so to speak.

Battleship_game

What I mean by “play Battleship” is – think about what’s worked well for your small business, and expand upon that. Once a particular opportunity has been fully exploited, you can change your medium, message, or any other variable until you get another hit.

When you get another hit, only make small tweaks until that opportunity is exploited. And so on…

Don’t let your marketing stray too far from your target market, however. Your entire business is built around your target market. A target market can grow or change over time, but that’s a longer-term undertaking. Advertising can be more flexible and nimble.

A thorough analysis is worthwhile here. While, yes, there is such a thing as branding and it has its value, advertising should provide you with a good (and quick) return on investment. Hold your advertising, and yourself, to high standards. Advertising is expensive and you don’t want to be throwing those dollars away.

Analyzing competitive advertising

This might be the easiest part of the marketing plan to analyze what your competition is doing. After all, the point of advertising is to get as many eyes on it as possible.

That being said, it’ll be damn near impossible to know what your competition’s ROI is on their advertising. However, being an expert in your industry, you’ll probably know effective advertising when you see it. So, when it comes time to play Battleship again, you’ll have a good idea of where to start.

How will sales compliment your marketing plan?

Marketing turns people unaware of your product or service into leads and prospects. From there, it’s the responsibility of the sales organization to turn leads and prospects into customers.

sales-conversion-funnel-illustration
Credit: pinterest.com

Not every business will employ direct salespeople. However, keep in mind that any employee which has contact with customers is a defacto salesperson. Make sure that these people are adequately trained and are not leaving sales on the table.

You can’t fix what you can’t measure. So, be sure that you have the means to measure your conversion rate along the entirety of your funnel. Also, are your people properly incentivized to make sales? Obviously, there’s no law that says you can only pay incentives to salespeople. Paying a commission or a bonus is a variable cost that can have a high return on investment.

Speaking of costs, consider your costs tied to sales. Be wary of fixed costs. With high fixed costs, you’re starting in a hole. You have to reach a certain volume in order to break even.

If you’re confident that high volumes can be achieved, then that could be okay. If you’re not as confident, or your business has a high amount of financial leverage (debt), then you should probably steer clear of high fixed costs.

Performing a competitor sales analysis

Obviously, it’s difficult to know what your competitors’ cost structures are. Do they have heavy fixed costs or mostly variable costs? If they’re a high-volume competitor, hopefully, their costs are mostly variable. Conversely, if they’re low volume, you should hope that their costs are fixed.  

You’ll have to work with whatever information you can gather. It’s probably easy enough to discover if they pay their salespeople commission, and how much that commission is. You can probably also get an idea of what kind of sales training they offer.

The point here is to get an idea of where your small business stands in terms of its potential for sales success. You want to balance between being someone that the best salespeople want to work for, and your own bottom line.

What is your distribution strategy?

Making sales is great. But if you can’t get the product to the customer, what’s the point?  Not to mention the negative goodwill and customer dissatisfaction that comes with distribution interruptions and delays.

Customers don’t want to give you money just so you can make a hassle for them. They expect your customer service to be such that they don’t have to stress over getting the value that you promised them.

Authenticity, timeliness, and redundancy are the name of the game here. Communicate with your customers clearly, make it a priority to get the product or service in their hands, and have a back-up plan.

omnichannel-distribution
Credit: blog.magestore.com

Obviously, utilizing the power of the internet opens you up to markets you wouldn’t have otherwise had access to. This is an opportunity that comes with a lot of competition, however. So, if you plan on selling via the internet, you had better specify elsewhere in your marketing plan how you’re going to stand out from the competition.

Finally, don’t forget to factor these distribution costs into your pricing analysis. They’re, more or less, direct costs so they should be easily allocated.

Your competition’s distribution strategy

By now, you get the point. You want to look at what your competition is doing and decide what strengths you should emulate and what weaknesses you should avoid or exploit.

If your competition places some of the burdens of distribution on their customers – that’s something that you want to highlight in your sales, advertising, and promotional efforts. That is, assuming, that you don’t do the same.

Also, if you can put a distribution strategy in place that opens up a larger market than your competitors, then the likelihood that you can better them will increase significantly.

How do I write a marketing plan?

Hopefully, clarifying your unique selling proposition and fine-tuning your pricing will lay the groundwork for your advertising, sales, and distribution to be successful. Additionally, by keeping a close eye on your competitors’ marketing strategy, you can put your small business in a position to gain market share. Hell, you might even know their marketing strategy better than they do by the time you’re finished.

What this should translate into, is the maximization of sales and revenue for the coming year. That, along with effective cash management, will put you in a position to not only grow your small business’s earnings but to also take advantage of any other opportunities that present themselves.

Why Spreadsheets Are Your Restaurant’s Best Friend – Save…Costs, Time, and Headaches [VIDEO]

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Download the restaurant spreadsheets

How do I make an inventory list and other spreadsheets for my restaurant?

Spreadsheets serve as a great complement to, or replacement for, the other software a restaurant might rely upon. Spreadsheets can handle nearly any task you require of them. They are very versatile. Small restaurants, with a limited software budget, might find them particularly useful.

Are spreadsheets a “must have” for a chef?

Credit to the Backburner Blog for the list of things that restaurants can use spreadsheets for.

The author states that a computer is “Second only to a good set of knives”. And spreadsheets are “the cat’s meow.” They can help a restaurant with organization.

Spreadsheets can intimidate some people. But, they are only as complicated as you make them. It is suggested that you take a course if you must. Particularly if you want to take advantage of the power of formulas.

Spreadsheets will make your life as a restaurant manager easier. Once you take a little bit of time to climb the learning curve.

Spreadsheets can fill in gaps in functionality for pieces of software. Many POS systems and most accounting software will export to .csv format – which can then be imported into a spreadsheet.

Some of the things a restaurant can use spreadsheets for

  1. Staff scheduling
    1. Drop in pre-made shifts for each employee
  2. Order sheets
    1. Purchase orders for ingredients
    2. Automatically calculate tax and totals
  3. Vendor lists
    1. A master list of all vendors with name, address, phone, and email
  4. Daily prep lists
    1. Proactively plan for the workday
  5. Inventory control
    1. Summarize on-hand quantities and total value
    2. Summarize by category
  6. Variable food costs lists
    1. Credit to Food Truck Empire
    2. Calculate accurate batch and serving costs for recipes
    3. Price menu items profitably
    4. Watch the Spreadsheets for Business pricing strategy video and download the Price Sensitivity Meter
  7. Long-term forecasting
    1. Monthly inventory usage and levels
    2. Vendor costs
    3. Covers (people dining)
    4. Staff scheduling
    5. History can be compiled for any task and then can be used for forecasting
  8. Waste and food loss
    1. The total cost of waste automatically calculated
  9. Trends for menu items
    1. New items vs existing/old
  10. Scheduling specials
    1. Compare to other specials and existing menu items
    2. Find out which were successful and which were not
  11. Budgeting and financial projections
    1. Read the Restaurant Financial Projections Business Plan Example post

Questions

“How do I print these spreadsheets?”

  1. Highlight the cells you want to print
  2. Click on File > Print (or Ctrl + P)
  3. Choose “Selected cells” from the dropdown at the upper-right
  4. Don’t forget to select the appropriate Page Orientation
  5. Adjust any other necessary settings
  6. Click Next, then Print

“How do restaurants manage finances?”

With information.

Information comes from software, data, and analysis.

Good information = good decisions = well managed restaurant finances.

“How do I get financing to start a restaurant small business?”

See Is It Hard to Get Approved for an SBA Loan? 9 Testimonials.

Keeping good documentation will help with financing. Good documentation provides detail about how and why your startup restaurant will be successful. Spreadsheets are an excellent tool for providing documentation.

QuickBooks Online (QBO) Deposit Tutorial | Non-Sale Transactions [VIDEO]

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Entering a non-sale deposit into QuickBooks Online video summary

The simple explanation is:

Click on New (button, upper-left). Then Bank deposit (Other column).

A more detailed walkthrough is outlined below.

Deposit transactions

Undeposited funds from sales are not the only deposits that need to be made.

For a tutorial on undeposited sales, see the “Best Practice for Undeposited Funds in QuickBooks Online” video and post.

What are some examples of undeposited funds that aren’t from sales?

There are loan proceeds, cash from the owner(s), and refunds from vendors, for example.

There are also reimbursements (from employees) and tax refunds.

As you can see, not all deposits are subject to tax, and not all need to be matched with sales receipts/invoices.

Every transaction should be properly categorized, though.

How to enter a deposit transaction

  1. Click New (button, upper-left) and then Bank deposit (Other column)
  2. Select the Account (checking/savings/etc) for the Deposit to go into
  3. Enter the Date of the deposit
  4. Enter who the deposit was Received From (dropdown)
  5. Enter an Account (GL) (dropdown) for deposit to be recorded against
  6. Enter a Description for the deposit
  7. Enter a Payment Method (dropdown)
  8. Enter a Ref No. (e.g. check number)
  9. Click Save and new (button/dropdown)
    1. If you need to enter another deposit
      1. Save and close if you are finished
how to enter a qbo deposit transaction screenshot
Click to enlarge
Credit: qbo.intuit.com

“Does Crowdfunding Need to Be Paid Back?” Types and Examples

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“Is crowdfunding considered income?” Yes. Reward-based, equity, and donation-based crowdfunding are generally going to be treated as income by taxing authorities. Debt and real estate crowdfunding, due to their unique nature, will most likely not be considered income. However, if crowdfunding is used for business purposes, expenses can be deducted against the income.

Source

Of course, none of this is tax advice. You should consult with a tax professional before starting a crowdfunding campaign.

Crowdfunding is fundraising in the age of social media. It is a rapidly growing means for businesses and individuals to raise money.

There is no such thing as a free lunch. Or, so they say. Donors who contribute to crowdfunding campaigns will typically expect to repaid tangibly or intangibly.

How many types of crowdfunding are there?

Generally speaking, there are five types of crowdfunding. Most of which need to be paid back in one manner or another.

Reward-based crowdfunding

Many entrepreneurs and startups will use this type of crowdfunding to raise funds for a given project or the organization as a whole.

Donors are paid back with rewards. Often, the rewards are proportionate to the amount contributed.

Frequently, the reward will be the product or service that the crowdfunding proceeds were raised for. In other words, if an entrepreneur has an idea for a new product, they can start a crowdfunding campaign and repay donors with free product once manufacturing begins.

Equity crowdfunding

This is like traditional equity financing for a small business. Except, instead of offering equity in the company to select investors, it’s offered to the public as a whole. This type of crowdfunding is not paid back directly. Rather, donors are repaid through the appreciation of their equity.

Equity crowdfunding is also known as investment crowdfunding or crowd-investing. Since the funds raised are for getting a company off the ground, a considerable amount is usually needed.

Every donor will receive partial ownership in the newly-created company. Of course, the amount of ownership depends on the amount contributed.

Equity crowdfunding enjoys many of the same advantages and disadvantages as traditional equity financing.

Debt crowdfunding

This type of crowdfunding is better known by another name – peer-to-peer (P2P) lending. Like all borrowed money, debt crowdfunding needs to be paid back – with interest.

Debt crowdfunding is often used by individuals and less so by businesses.

It is similar to traditional debt financing in many respects. Funds are paid back on the P2P platform. From there they are dispersed to the lenders/donors. Interest is charged on the borrowed funds and repayment is made on an installment basis.

For a small business, debt crowdfunding has many of the same pros and cons as traditional debt financing.

Real estate crowdfunding

Real estate crowdfunding connects investors with real estate opportunities. This allows investors to diversify and participate in real estate investments without actually obtaining financing and dealing with ownership.

Investors can also get away with contributing considerably less than they would if they were participating in a traditional, large-scale, real estate investment.

This type of crowdfunding is paid back to the investors by the orchestrator of the real estate deal. Payouts are typically made quarterly and are dependent on the revenue-generating performance of the real estate investment.

Donation-based crowdfunding

This type of crowdfunding is more related to charity or fundraising than business uses. As such, it does not need to be paid back with cash.

Donation-based crowdfunding is typically used to raise money for personal needs or community projects. Oftentimes, fundraisers will go viral when they are for an especially empathetic cause.

Raising money for people who need help with medical expenses, financial hardship, or things such as a community garden are examples of donation-based crowdfunding. 

Is crowdfunding free money?

Even if the type of crowdfunding utilized does not require cash payback, contributors typically expect to see some sort of tangible return on the money they donated. That return could be as simple as seeing their donations contribute to some sort of net positive for society.

With all types of crowdfunding, there are fees withheld by the platform. This is how they earn their money and continue to serve as middlemen between donors and fundraisers.

Raising money through crowdfunding takes considerable effort. So, there is a cost beyond dollars and cents.

First of all, it is necessary to create a compelling story. A reason for your potential donors to contribute to your crowdfunding efforts. This is not to say that the story should be fabricated or embellished. Rather, it must be conveyed in such a way as to pull on potential donors’ heartstrings and purse strings.

The other challenge is the marketing of your campaign. Crowdfunding is a heavily-used and continually-growing medium for raising funds. If you want to meet your funding goals, you’re going to have to exert considerable effort to get your campaign in front of eyeballs. This effort can be your own, or you can hire help.

Finally, if you set up a donation-based or reward-based crowdfunding campaign, you need to be prepared to return that money if you can’t meet the goals you promised…

Paying back crowdfunding money

Generally speaking, there are two options when raising money via crowdfunding.

With the “all or nothing” option, if you don’t hit your target, then no money will be taken from your supporters. The crowdfunding money is paid back to them automatically.

Alternatively, with the “keep what you raise” option, you receive whatever has been donated. Less the platform’s fees, of course. If you’ve raised considerably less than you anticipated, then the scope of your project will probably have to be scaled down.

Source

Obviously, with the “keep what you raise” option, you would be required to pay back what you raised subject to the requirements of that particular type of crowdfunding.

If you don’t pay back your crowdfunding proceeds as outlined in the terms of service, then you could be compelled by the law to pay it back…

Crowdfunding examples

Crowdfunding can be good, bad, or ugly. One example each of successes, failures, and frauds are listed below

Good – Oculus Rift

Link

The Oculus Rift virtual reality headsets were the offspring of a 2012 crowdfunding campaign. At the time, the campaign raised $2.5 million dollars from 10,000 or so donors.

Two short years later, Oculus was purchased by Facebook for $2 billion. One hell of a return on investment.

Bad – Induratus

Link

Induratus might’ve been a good idea. But, the creator of this crowdfunding campaign either failed to create a compelling story or failed the market his campaign effectively.

Induratus’s crowdfunding campaign had a goal of nearly $5 million CAD. Unfortunately, it only managed to raise one single solitary CAD, as of 2015.

Ugly – Coolest Cooler

Link

In 2014, the creator of the Coolest Cooler ran a reward-based crowdfunding campaign that raised a whopping $13.2 million dollars.

Donors we’re promised coolers once manufacturing was set up. Unfortunately, production delays and other problems resulted in tens of thousands of donors getting stiffed. By 2017, Coolest Cooler had to settle with the Oregon Department of Justice.

Is crowdfunding considered income?

Crowdfunding can be a great way to get your startup off the ground. However, before you start a campaign be sure to educate yourself on the tax ramifications of your particular type of crowdfunding.  Also, be sure to pick the type of crowdfunding that is right for your project or business.

Make sure to create a compelling story and have a marketing plan ready for your crowdfunding campaign. this will help ensure that your campaign is successful and meets the goals of your small business.

Is It Hard to Get Approved for an SBA Loan? 9 Testimonials

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Considering applying for an SBA loan?

Afraid that all your time and effort will leave you saying “Why did my SBA loan get denied?”

  • Lack of collateral
  • Applying at too big of a bank
  • Personal credit score less than 680
  • Business credit score (SBSS) less than 160
  • Poor business plan and financial projections
  • Lack of business equity
  • Poor/lack of documentation
  • Lack of industry experience
  • Applied for more/less than the lenders maximum/minimum

These are some of the reasons your SBA loan might get denied. At least according to a sampling of Reddit users. Reddit can be helpful, particularly in cases like this. It is usually a cesspool though. So, I saved you a trip.

SBA loans are highly sought-after because they have reasonable interest rates and long repayment terms. If you’re considering pursuing an SBA loan, browse through the following testimonials to get a better feel for how hard it can be to get approved. Hopefully, it will help you be better prepared and will increase your odds of approval – if you decide to apply.

Do you need collateral for an SBA loan?

user/TheSuperDanks

If you have minimal collateral, good fucking luck.

My buddy who is extremely credit-worthy had to basically sign his life over to get his SBA loan. He owns 2 houses, has great credit, etc. The program is just a ton of paperwork.

Source

This Reddit user seems to think collateral is needed for an SBA loan. Granted, they didn’t apply for the SBA loan themselves. It was a “friend.” However, as you read on, you’ll see that a lot of other users corroborate the notation that considerable collateral is almost always necessary.

Here’s an idea of what types of collateral the lender might be looking for:

  • Real estate
  • Equipment
  • Inventory
  • Accounts receivable (AR)
  • Personal assets

Chances of getting approved for an SBA loan

user/prosignandgraphics

I have applied twice and received an education in the process.

Application Attempt #1: full business plan, a lot of drive, lots of experience in my field, a great idea but no assets to secure the risk = NO WAY

Application Attempt #2: 5 years of experience under my belt, solid cash flow, good chunk of savings, equipment and A/R to secure the loan risk = YES, how much do you want?

So basically, if you already have the money / collateral / cash flow you have a good chance of getting the loan. If you have no assets, cash flow, accounts receivables, savings etc. then your chances plummet to practically nothing.

Source

This user, again, cites the importance of collateral.

If they’re to be believed, they had a lot going for them when they tried to get approved for their first SBA loan. However, they had no assets to help secure it.

It should be noted that they also had five years of experience upon the second application. It’s unknown how much they experience they had upon the first application. The implication is that they had very little.

Nevertheless, while the experience helped, it seems obvious that collateral contributed to them getting approved the second time around.

So, what are the chances of getting approved for an SBA loan?

Well, it seems to depend on the type of bank you apply at.

Large banks are choosier – only approving approximately 25% of SBA loans.

Small community banks and credit unions are what SCORE recommends that small businesses use. They might be on to something because these types of institutions will approve almost twice as many SBA loans. Source.

Are you personally liable for an SBA loan?

user/Pseudo_Prodigal_Son

So the easiest way to make sure your loan gets approved is to own an asset that is worth as much as the loan amount.

Almost all banks doing SBA loans will want an asset to guarantee the loan. And unless the business has large assets (e.g. a building) they can use as collateral, they will want to use your house as collateral. If you business fails, they will take your house. If you don’t own a home or have other suitable collateral, they will not give you a loan.

Source

This user gets a little more specific regarding collateral. They state that the assets you use for collateral need to be worth twice the loan amount.

While that might not be technically true, it’s generally believable. I’ve worked in personal lending for a while and I know that lenders rarely lend 100% loan-to-value (LTV).

Why do banks loan less than 100% LTV? Because, in a worst-case scenario, when they have to repossess the asset, they’ll rarely get what it’s “worth.” The liquidity of the asset can be very low and/or they’re in a hurry to sell it. Not to mention the asset is probably in less-than-stellar shape. Therefore, they get less than market value. That’s why they like to lend less than 100% LTV.

How much less depends on other factors related to creditworthiness.

As mentioned above, personal assets can potentially be used as collateral in lieu of business assets.

Also, if you own more than 20% of the business, you have to provide a personal guarantee for the SBA loan. Because of these factors, you are most certainly personally liable for an SBA loan.

What credit score is needed for an SBA loan?

user/__Focused__

Loan broker here.

Most SBA-backed lenders won’t touch a deal that is below $50K. Your credit is also bordering on the minimum (many want 680+) and a loan would likely weigh heavily on your assets and/or downpayment.

Source

Here, we see a user touch, again, on collateral. However, they also focus on some different requirements. Specifically, the minimum personal credit score of 680 and the minimum loan amount of $50K.

Keep in mind that there are SBA loan options for less than $50,000 – as mentioned in other testimonials.

The personal credit score needed for an SBA loan is set by the lender, not the SBA. So, the minimum personal credit score will vary.

Generally speaking, if your personal credit score is below 640, it’s very unlikely that you’d get approved for an SBA loan. In fact, plan on having a personal credit score of at least 680 to be “good enough.” As always, though, an even higher personal credit score can only help you.

As far as a business credit score goes, plan on having an SBSS (business FICO) of 160 or greater. No less than 140. Source.

What documents are needed for an SBA loan?

user/sawbucks

I’ve been successful at acquiring two separate sba backed loans. As another has mentioned you will have to write a business plan showing how you intend to use the money, how that plan will increase your revenue, and also how much additional revenue you intend to see. I used my first loan to purchase an existing business and had to show how I intended to improve the current business and come up with 3 years of projections and show how each part of my plan would affect these numbers over time. It was very involved including phone interviews with the underwriter and a very deep dive into the business itself. I was told something like 70% of sba loans dont get approved but if you have strong financials and a strong plan for the money I think youd be ok.

Source

This user had to come up with a full business plan and financial projections.

This intensive documentation shows the lender that you have thoroughly thought out how you’re going to invest those SBA loan proceeds in your business. You’ve also considered the environment your business will operate in and what effect it will have on your operations.

Numbers don’t lie (usually), so you can’t hide behind abstract promises when you are forced to come up with solid financial projections. 

Beyond the documents needed for the SBA loan, notice how the lender also made them qualify their assumptions. So, be prepared to “defend” your position when you apply for this type of financing.

How long does it take to hear back on an SBA loan?

user/abcriot

I just got an SBA loan for $100k, guaranteed by the state (CA). I have a service based virtual business out of my home. I’ve been in business less than 1 year, which is seen as risky. They required I put a capital injection of 20% ($20k), so I had to show that I in my year of business I had put at least $20k of my own cash into my business.

The whole process wasn’t to hard, but it was long. I started in November and got funded the second week of March.

Source

This user bucks some of the other’s experiences. They make no mention of collateral. Just a contribution to capital of 20%.

This goes to show that not all SBA lenders are the same. So, if you are declined at one lender, don’t give up!

The user also claims that the hardest part of getting an SBA loan was the wait.

Their experience doesn’t seem to be too out-of-the-ordinary. From start to finish the process for getting an SBA loan seems to run anywhere from 60 to 90 days. More in some cases.

It’s hard to say when in November this user started the loan process, but, at the most, it only took them one month longer than usual to hear back on their SBA loan.

This could have been due, in part, to the amount of time it took them to assemble the needed documentation. It’s difficult to know. As specified in other testimonials, the documentation requirements can be considerable.

Therefore, try to assemble the needed documents ahead of time. Also, don’t wait until you absolutely need the financing to apply. By the time you hear back, you could have missed the opportunity you hoped to capitalize on. Or, if times are tough, you might have missed the chance to right the ship.

Can you get an SBA loan for a startup?

user/nickwimp

Can you provide a overview of what’s required to qualify for a SBA loan? my father and I are starting a machine shop and need a total of 350k to get the doors open. machine costs are around 250k. Thanks

user/saxscrapers

Solid, well-thought out business plan. Personal credit scores above 640 or if not, a really good story for why so low. All owners greater than 20% guaranteeing loan. For start ups, equity injection of 20-30% (or more- it would only help). Post-transactional (after loan has been made) liquidity of the owners to fund any short term expenses that were not foreseen or some sort of outside income. Good experience of the owners/managers.

If you have all of those things, you should be pretty good. All banks have different credit tastes and prefer some industries to others, so just because one bank is not interested doesn’t mean a different one wouldn’t be willing to work with you.

Source

This testimonial, and a few that follow, are from an “ask me anything” (AMA) Reddit post. In this post, an individual claiming to be a credit analyst for an SBA lender answered some other user’s questions.

This particular user asked about getting an SBA loan for their startup machine shop.

The credit analyst touched on some previously mentioned requirements such as credit score and personal liability. They also mentioned the “skin in the game” needed to get an SBA loan for a startup.

As mentioned previously, 20% equity is pretty standard. This shows the lender that you have something significant at stake. Which, in turn, increases the likelihood that you’ll repay the loan rather than walking away from the venture if times get tough.

The credit analyst mentions that 30%, or more, will only increase your chances of getting an SBA loan for a startup. In the lender’s mind, the more you have at stake, the more you’ll work to succeed.

The credit analyst goes on to mention how financial projections are important. But, they aren’t going to be precisely correct. So, consider how you might finance any near-term startup expenses that you didn’t anticipate.

Finally, the credit analyst mentions something that hasn’t yet been addressed in a testimonial. That’s industry experience. This is an intangible that can help you get an SBA loan for a startup. It won’t necessarily overcome some of the quantifiable requirements (credit score, equity, collateral). But, it can help influence a lender that might be on-the-fence about some of the other aspects of your business plan.

Does an SBA loan show up on a credit report?

user/moneymonda

Do you run business and personal credit reports in the loan approval process? If so on the business credit reports, are they through experian or dnb or something else? How much do the business credit scores weigh on the approval process since it can be common for a small business to not have many (if any) tradelines reported to the bureaus?

user/saxscrapers

We absolutely run personal credit reports on all guarantors of the business (SBA requires anyone with 20% or more to guaranty, or if a spouse owns between 5 and 20%, but the other spouse has over 20%, they both must guaranty). The initial bank i was with did not order business credit reports as they were rather small, but the bank i am with now does. Depending on the type of business, trade line history can range from not applicable (for cash businesses) to pretty important. The business credit reports are from either DnB or CreditSafe and show tradeline history, and collections or tax liens that are outstanding or were in the past and any UCC liens on the business. The business credit reports aren’t as influential as the personal credit scores, but do carry some merit.

Source

This user asked the credit analyst if both personal and business credit reports were run during the SBA loan application process. In particular, they wanted to know what agencies were used to pull credit. Finally, they were interested in what weight was placed for each (personal and business) credit report.

From what the credit analyst conveyed, personal credit reports are almost certainly going to be run on any individual with significant ownership in the business. And, possibly on their spouse.

Business credit reports are a different story. This is up to the lender and may depend, in large part, on the industry you operate in. Additionally, the credit analyst stated that business credit reports didn’t weigh as heavily as personal credit reports. Which is somewhat counterintuitive since SBA loans are, technically, business loans.

Knowing that credit will be pulled might lead you to ask “will an SBA loan be reported on my credit in the future?”

Details are hard to find here, but it seems that the SBA loan will show up on your business credit report. Not on your personal credit report. Even though you will likely provide a personal guarantee on the loan. Source.

How many times can you get an SBA loan?

user/luxorius

How long does it take to obtain a SBA loan, on average? What is the smallest and largest loan size available, typically? What is the duration of the instrument? Do SBA loans typically fund a company more than once? What is the minimum balance sheet coverage and other collateral coverage that SBA loans are backed by? What types of ratios and covenants comprise SBA loans?

user/saxscrapers

From start to finish, if you have all documents needed to underwrite your loan, it can take as little as 2 months from application to closing, but those are pretty rare. Time is always a huge variable, and depending on the nature of the transaction, they can take as long as 6 months or so.

Smallest loan size depends on the bank. The bank I work at doesn’t do anything less than around $150K. There are microloan providers which only focus on loans less than $100K or so.

Duration is 7 years for working capital, 10 years for leasehold buildout/business acquisition, 25 years for real estate purchase or refinance, building improvements and possibly for equipment purchase if you can prove the equipment you are purchasing will have a useful life of 25 years. All SBA loans are fully amortized with no balloon payment.

There is no minimum balance sheet coverage for SBA loans. There is a minimum of 10% tangible net worth for USDA loans.

The great thing about SBA loans is that they are designed for borrowers that don’t meet conventional collateral requirements. Banks are specifically told to not turn down loans based on a lack of collateral given all other factors of the loan are positive (cash flow, credit scores, management capability). The one thing to note, though, is if the loan isn’t fully secured, banks are required by the SBA to lien personal real estate of the guarantor/principal if there is 25% or greater equity in the real estate.

There are circumstances where the same company will get multiple SBA loans but that is a pretty uncommon occurrence. You will see guarantors with multiple businesses that have different sba loans for their different businesses.

Ratios that we use the most are current, quick, debt to tangible net worth, gross profit margin, net profit margin, days receivable, days payable and days inventory.

Source

This user had a lot of questions and the credit analyst took the time to answer them in-depth. So, there’s a lot to address here.

First of all, the credit analyst confirmed what had been addressed in an earlier testimonial. That the quickest you can expect the SBA loan process to go is two months. What was surprising was that they also said it can take up to six! This reinforces my earlier advice to plan well in advance.

The largest SBA loan you can get is $5 million. This is a firm number.

The smallest, though, depends on the lender. Keep in mind that the SBA has several different loan programs, some of which are designed for smaller loan amounts. This would be a good question to ask before the loan application process starts. So that you don’t waste your time and hurt your credit if the amount you need is below the lenders minimum.

From there, the credit analyst addresses the term of SBA loans. This depends, in large part, on what the proceeds will be used for. If it will be used for expenses (working capital) the term will be short. If it will be used for long-lived assets, the term can be longer. Of course, the longer the term, all things being equal, the lower the payment.

Next, we have some new insight, not discussed in any of the other testimonials. It comes back to the topic of collateral. According to the credit analyst, if your collateral isn’t worth enough to fully secure the loan, the lender will put a lien on your personal residence. In fact, they’re required to by the SBA.

I confirmed this elsewhere. Source.

This is very important!

While SBA loans are hard to get approved for, in light of collateral requirements. These requirements can actually be in your favor. Remember the testimonial earlier that mentioned having 2x the loan amount in collateral? That’s probably a good rule-of-thumb to keep in mind, should you decide to pursue an SBA loan.

The credit analyst goes on to briefly touch on financial ratios. These will vary by industry and be calculated in your financial projections.

Finally, maybe the most pressing question in this testimonial is “how many times can you get an SBA loan?”

This depends on what you mean by “how many times.”

Of course, if you got an SBA loan and paid it off you can get another. Assuming that the loan stayed in good standing, I could only see it working in your favor.

What about multiple SBA loans at once?

Well, it technically can be done. Up to a given SBA program’s limits. Source.

But, according to the credit analyst, it’s pretty uncommon. It’s unknown if this is because of how hard it is to get approved for an SBA loan. Or, for another reason. The exception is an individual who owns multiple businesses and takes out an SBA loan for each.

Why did my SBA loan get denied?

As you can see, there are many reasons an SBA loan might get denied. These loans are hard to get approved for and the requirements are stringent. Fortunately, there are other options if you decide an SBA loan isn’t right for you or you get denied. Good luck!