[cob]

dont know if this is the right place to post this but has any one ever got a SBA loan to start there machine shop. if so how did you do it.

[cob]

ok since nobody has got a business loan from an SBA. can someone guide me in the right direction by sharing there business plan I think I am going to need one if any can share
thank you

[harryn]

I looked at SBA loans in the past, but not recently. At that time, they required you to put substantial equity against the loan, which for many small businesses, was the owner's home. The fact that the loan is SBA backed covers the bank, but not really you. The banks ended up with a lot of people's homes this way.

As a general rule, you want to try very hard to use equity (invested) money for fixed assets like machinery, and only use borrowed money for materials and work in progress. That is easier said than done of course.

The ideal situation for someone wanting to start a machine shop today, is probably to find someone that wants to "sell", and work out a deal with them. If you really want to explore this, send a pm to me and I can help you through it. I do this for a living, but can give you a few free pointers to go forward on your own if you like.

Take care,

Harry

[ViperTX]

cob,

Everyone's business plan will be somewhat different for a machine shop because of specialization, in other words what your shop is offering, that others do not offer and that is in demand.

Simplistically, this is how I plan. Let's say that I want to earn $3000/month take home, I need to have a gross salary of approximately $3750/month at the 20% income tax level.

So, if I have a business that is able to yield 10 per cent profit per month, you will need to be able to bill and collect $37500 per month just to cover your salary. So, for a year that means at least $450,000.

Now realistically in business from the time you deliver your goods and bill to the time you get paid is generally in the 60 to 90 day range, with today's economy that is probably a bit low. Also, the assumption is that you will get paid for what you bill....another big if.

Do you see how the cash flow analysis works.....for the first 60 or 90 days you have expenses, but no cash flow.....

We haven't even considered your building rental, utilities and advertising which we could roughly say is 1/2 your salary, now you need to gross 50 percent more for a total of $675,000.

Now, let's say you were able to get a loan SBA or other....say you needed 6 months of operational expenses $225,000 plus money for equipment rentals....say a VMC which cost you $3000 per month after a down payment of $10,000.

So, just to cover the VMC's expenses you need to bill an additional $360,000 at your 10% profit level.

Okay, now let's amortize your $225,000 + 10,000 for 12 years at something like 7% which may or may not be doable....your payment for this is $2416 and change and at the 10% profit you need to bill and collect an additional $289,920 to service the loan.

So, let's see we are now at $1,324,920 as the amount of annual business we must bill and collect to pay your salary and cover your expenses and service the loan.

Now where most busineses fail is that they use the loan for the 6 months of operational expenses without generating the amount of business to sustain themselves and 12 to 18 months later they are out of business.

So, in a business plan you have to show what your projected sales will be each month and how they will increase every month to the level where you can cover all your expenses, pay back your loan (creditors) and save enough money for next month's operational expenses.

Hopefully, I didn't mess up the numbers....a couple of glasses of wine.....

Hope that helps.

Paul

[timlkallam]

Wow Vipertex , I bet Cob is feeling a little discouraged about now .You got him spending over a million to make $36,000 a year. I'm glad I don't understand big business.

Hers my business plan, this is what i did and you can take home well over $50,000 a year.

Save our money buy a used vmc a and lathe pay cash for them , But them in your garage or basement . Stay out of dept.

If you charge a modest $50 an hour and work 25 hours a week = 1,250 x 52 =65,000 year.

[123tool]

WoW those numbers sure do add up... it's almost mind numbing.

The simple way is to create your own widget that you manufacture and sell direct. For you to GROSS $3,000 a month you build in a profit of 75% so you need to sell $4,000 a month, your costs are less than 20% materials then you add a web site, cell phone, elect. and BTW you work out of your garage. It takes one hour to produce 4 large widgets that you sell for $100 each or 10 small widgets that go for $50 each so every month you need to sell 40 to 80 widgets a month to get the $4,000.

To manufacture 80 a month you won't need a zillion rpm or ipm machine so a standard manual mill/lathe is fine and 3 weeks out of a month they won't even run. Reinvest in other machines so you can create more widgets to sell and soon you'll have widgets of all shapes and sizes. If you buy everything cash no one will be able to take it away or when you decide to quit you'll have some nice machines.

Do create a company (LLC) and take advantage of the business deductions. Remember, if you make the best widget on the market people will find you, if you don't you need to find the people so make the best one on the market. Don't laugh to hard because this is a real business plan done on a lot more volume than the example so it works. Don't take out a loan because there is no reason... why put that much pressure on yourself when you don't have to. The advantage of starting small is the business mistakes made in the begining are smaller and you can recover from them without much damage, as the business grows less mistakes are made... then you make some real money.

[ViperTX]

Well cob, don't mean to discourage you.

Just think of the "pearls of wisdom" that both Tim and 123tools have revealed. Self funding and working from your home and doing the type of work that yields a higher profit or return-on-investment.

Tim, are you only offering a service where the customer supplies all the materials and you supply the labor, expertise and machine work?

Tim, let's look at your case. You purchased a used VMC and lathe....I'm not sure how much that cost, but let's say it was $25,000. So, you have an upfront investment of $25K and you're grossing $50,000 which you're using to pay for your housing, transportation, utilities, disposal fees for your used coolant, maintenance of your machinery and the ocassional expense for that new 6 jaw chuck, test indicators, etc.

Let's say that your house is costing you $1000 per month, that 2 year old truck is another $400 per month including the insurance, and we can't forget the better-halfs transportation another $300, electricity and gas another $300 per month, now if you have a family...well there are the family expenses and after all the expenses and hopefully you are depreciating your equipment (in other words you have a business setup LLC, Corp, etc.) you find that you're able to save $2500 per annum. So given that your initial inventment was $25,000 your return-on-inventment is approximately 10% the first year, if you're able to save the same amount over the next 15 years years you will have recouped your initial investment (at least you think so.)
I won't bother to do the actual calculations, but the $2500 that you're able to save each year over the next decade or so, is worth less....it is generally referred to as the discount cash flow rate.

So, sometime in the future (10 to 15 years) you're be holding that $25K in your hands and saying to yourself I haven't lost any money! But in reality in 10 to 15 years your $25K will have lost anywhere from 50 to 75% of its purchasing power. Of course, the assumption is that the better-half has not convinced you that you all need a new sofa, dishwasher, car, etc, afterall you've got all that money in the bank.

The morale to the story is you minimize your upfront investment and maximize your profits which is what you and 123tool are basically saying.

cob, you can contact the local SBA office and they have a stack of forms which you'll need to fill out, you can then sit down with them or SCORE and work on the business plan, do a cash flow analysis and they will give you a list of lending institutions that you will need to approach for a SBA guaranteed loan which in most cases will only be 80 to 90 percent of what you think you need, you'll have to pony up the difference. There is a limit on how much you can borrow for operational expenses, the limit for capital goods (buildings and some equipment is much better as the SBA/lending institution can foreclose on those and recoup some of their money).

I'll give you a big hint when you approach the lending institutions you need to know what you're talking about and need to be firm on how you will grow the business.....basically you have to be a hard-ass, because the banker will test you.

Hope that helps.

Paul

[harryn]

Hi, just a quick comment - I strongly suggest to set up a C corporation instead of an LLC. IMHO, the flexibility is much higher.

There are many who think I am crazy for this approach; however, and strongly advocate the LLC structure. All I can say is that there are very few, large, successful businesses that got there by being an LLC, and a whole lot of C Corps.

[ViperTX]

harryn,

If you're going to be a publicly-traded company then a C corp. is definitely the way to go. for a small closely-held company which lacks the expertise required to be publicly-traded then an LLC is the way to go.

From a tax point-of-view the LLC is the best way to go until you get so large that you want to retain earnings...you can always move from an LLC to C corp.

Paul

[cob]

hey fellows thanks for all the replies they have been very helpfull and at the same time makes me feel why would anyone even start a business if I am going to have to generate about 1 millon dollars just to make 40,000 dollars as my sallary.
this is my situation I especiallize in something very few people do ,I added up all the machinery I needed about 60,000 dollars wourth and I only need about a 1000 to 1500 sqaure foot to start my shop.
and really I like what I do so to me making a millon dallors is not what I am after (eventually I hope i make) I just want to work for myself and try to see if I can do want I want and how to to it with no one on my ass all the time.
so thanks again for all the good input. if you have any more suddjestion or how did you go about starting your own shop. I would be very intersted in how you went about doing your own thing.
thanks again.

[harryn]

harryn,

If you're going to be a publicly-traded company then a C corp. is definitely the way to go. for a small closely-held company which lacks the expertise required to be publicly-traded then an LLC is the way to go.

From a tax point-of-view the LLC is the best way to go until you get so large that you want to retain earnings...you can always move from an LLC to C corp.

Paul

Hi Paul - I get that point of view back a lot. What I can tell you, is that even with my small consulting company, it has made a lot of sense to retain earnings in it, and the fact that it is a C Corp does not imply any intention on my part to go public.

At least in CA, you save absolutely nothing doing an LLC vs a C corp, and IMHO, the flexibility is much greater.

Cob - I suggest that you will never have "no one" riding your tail, be it a boss or, if you are lucky, a customer. IMHO, there is no point starting a one man machine shop - you will only succeed with at least the ability to bring in 4 - 5 people.

[harryn]

Hi - for those who follow this sort of thing, there are some small companies out there that are now in quite an interesting spot with the IRS. They used tax advisors to setup some medical and retirement related structures / tax shelters which they believed were entirely legal - and - they had an IRS document that they "thought" made it all work.

As it turned out, the shelters were "considerably flawed", and they did the paperwork incorrectly. (maybe on purpose - who knows). In any event, congress was frustrated by these kinds of shelters, and directed the IRS to go after them with full force - with $ 100,000 per "error". 12 employees - 12 errors - it adds up fast.

If the firms had been set up and really operated as "C" corps. the liability would not extend outside of the firm, no matter how bad things went. Most of them were set up as LLC and S corps - so guess what - the liability extends back to the personal propery of the owners.

Another reason to consider a " C " corp. structure and operation.

[cob]

what does " C " corp.
mean and how does it work

[ViperTX]

C corp is what you have when you incorporate your business. You see it used like this Forbes, Inc.

A C corp is its own entity, unlike a LLC (limited liability company/corporation). An LLC can have a managing owner/partner while a C corp. has shareholders as the owners of the company.

In a C corp. you have a double taxation system....the profits of the corporation are taxed when they are made and when the profits are distributed as dividends they are taxed again.

In a LLC you generally have to disburse your profits to each owner and the profits are taxed at the owner's income tax level.

Paul

[ViperTX]

cob,

If you're applying for an SBA loan, you only have until October to get a 90% loan guarantee, check with the SBA about the date after that date they will drop to an 80 or 85% level, which basically means you have to provide the difference in funding 10 % or 15/20%.

So, get your butt in gear.

Paul

[harryn]

Dividends are but one of many ways to move income from your business to your pocket with a C Corp. A C Corp can also take deductions in ways that are impossible for other structures.

Take a look at 2 simple examples:
- health insurance
- paying yourself as income

C corp - full cost is deductable as an expense, no matter if you are profitable or not. Left over losses can be carried forward to more profitable years.

LLC / S Corp - only deductable if you are profitable

Individual Proprieter - only deductable if your total medical expenses in THAT year exceed something like 7-10% of income, and then you can only deduct the part that exceeds this.


Paying yourself money
- dividends - sure that is one way
- own some equipment and rent it to your business under a firm written contract
- license a technology from yourself to your business
- Pay yourself income at a level that stays below the jump in rates - that is deductable as an expense

I am a "one man show" operation with a "C" Corp, and have done some of the others in the past. We (my own and the C Corp) are 100% legit on our taxes, and I can tell you, it is less this way. Go talk to a professional tax preparer with 10 examples in hand for income, various expenses, etc. Have him run some numbers for you and see which works better.

[cob]

thanks for clearing some of this stuff up
please bear with me because all this is knew to me
so basically the best way to go is incorparated (c crop) is that what you mean.
thanks

[ViperTX]

cob,

You can always go from an LLC to a C Corp without any problem.

The biggest hurdle you face is becoming profitable...each has its advantages. Just pick one and go with it.

I'm not sure what state you're in, but your Secretary of State most likely has a web site with all the forms you need to file. Generally, you will need Articles of Incorporation, and you'll want to file as a small entity (I think that is what it is called) to avoid the SEC requirements, this basically means that you can only sell stock to knowledgeable investors, and there is generally a limit of 30 inventors, and you can't advertise the sale of your Corporation's stock. It is pretty simple to set up and your State's web site will also has requirement's of what you have to file at the end of each year (normally an annual report, board meetings to discuss business, etc.)

You will have to get an Employer ID from the IRS, etc.

Feeling swamped again....

Don't get bogged down, take your first steps and ask questions as you go along, there's enough experience on this site to make your head swim.

Paul

[fredhh47]

Four words of advice: DON'T FRACKIN' DO IT!
1. If you do, the lender will push you to go to the highest possible amount that they imagine you might be able to pay, if a miracle occurs. (But they don't really care if you don't, they'll take everything of value that you own).
2. The SBA will offer you almost no advice or counseling, and don't even bother to ask the lender.
3. If you REALLY, REALLY want that over-inflated loan, you will spend 6 months to two years trying to prove how the hell you're going to pay it. Financials and bank statements are only the tip of the iceberg.
4. After two years of monkeying around, when you actually sit down to sign the loan forms, you find out that you're paying the SBA 2% of the loan up front. Consider this about as useful as buying "insurance" from an arsonist who is about to burn your house down.
5. If you ever get into trouble, DO NOT EXPECT the SBA to help you out. They may sic some retired executives on you to "guide" you, but what do they know about your business.
6. When or If you fail, they will come after you like the hounds of hell and will show no mercy. Not the SBA, mind you, the Lender. The SBA will be hiding in the shadows behind the lender, hoping like hell you pay up, so they (the SBA) don't have to pay off the lender and then try to collect from you. And they WILL try to collect from you, even if the lender got every last nickel you had.
7. The lender wants only one thing. Your monthly payments, interest and late payment penalties.

'Nuff Said.

[driveshaft]

It's a shame that this world had gotten so complicated. I come from a small town and in 1979 at age 24, I went to a bank that didn't know me, but the president knew my family name. He loaned me the money to buy into a failing business that in his words, "the community needs this business", so he took a chance on me. Unheard of these days!
Of course we weren't talking about that much money in todays world. I succeeded and became his next door neighbor a few years after.

30 years later, still in business (a different business) , working alone now, still a "C" corp, same wife, same CPA, same bank, but my friend/ neighbor/ business mentor has passed away.

I don't have any opinions or experience on an SBA loan but I will tell you that being successful in any business isn't easy. Sometimes I wish I had a good machining job to go to everyday instead of dealing with the public.