Rob Semrad’s advice is hard won. His wife was three months pregnant with their first child when, two years after going into business for himself, he had to tell her that their home was on the brink of foreclosure and he feared that their cars would be repossessed.
Through some savvy negotiating with his debtors, however, Semrad turned things around. Today, as head of DebtStoppers and a thriving bankruptcy law firm headquartered in Chicago and Atlanta that employs 140 people, he’s well-positioned to help his clients avoid the mistakes he made.
He says new business owners need to go in with their eyes open, be prepared, and be practical. Too often, Semrad says he sees entrepreneurs making personal or emotional decisions instead of financially prudent ones. He’s an attorney, but in a conversation with Yahoo Small Business, Semrad’s words of wisdom for anyone starting or financing a business are more like therapy than legal advice:
1. Be realistic about what you’re taking on. People like him who start their own business after being the right-hand-man to another business owner think they know what goes into running a firm, Semrad says. “Many of us think that if we’ve been running a company, 9-5, for someone else, we can do it for ourselves. But if you don’t own the business, you’re not seeing all the financial aspects that come with ownership,” he says.
2. Prepare your loved ones for the consequences of business ownership. Maybe you’re starting a business to be free of the drudgery of an office job, or to spend more time with your family? Beware: as a new owner, you’ll likely be working twice as much for half the pay. “In the first two years, you might not even be bringing in a quarter of what you were earning on salary. Setting up a realistic personal budget is crucial,” Semrad warns, “and it’s really important that you discuss that with your family. If your significant other doesn’t understand, you’re going to have major problems.”
Semrad meets plenty of clients who didn’t want to scare their spouse by suggesting household cutbacks, let alone suggest their kids start out in community college instead of taking a second mortgage to pay pricey tuition. “They see giving up something for any reason as a failure,” he says. But those entrepreneurs who reduced their personal budgets set themselves up to have more flexibility in their businesses and thus ultimately greater success.
3. Start out by planning your way out. To small business owners pursuing startup loans, Semrad advises going in with not just a business plan, but also an exit strategy: “Look at the short term as well as the long term. Know what you need to get through 12 months. Don’t take a loan that’s higher than you need.” Semrad says many owners he sees “would have been better off taking a line of credit instead of drowning in debt.”
4. Know that you are personally liable for your business debt. “Don’t make the mistake of thinking that if you’ve formed a limited liability company you won’t be personally liable for your business’s debt. That’s not true,” Semrad says. “If you’ve been in business five years or less, the banks require the individual to have excellent credit as well as assets they are willing to put up for the company, such as real estate, a home equity loan, anything you have in the bank, stocks, or other accounts. They need you to have a personal stake in the business.” Be sure you understand what you’re risking, he says: “When you take a loan, you get one bite of the apple. If one business fails, banks will be leery of loaning to you again.”
5. Don’t overdo it on the cash advances. Semrad sees plenty of entrepreneurs launch by a taking a line of credit on a credit card. You want to have enough funding to give yourself a good chance of succeeding, but you don’t want to take more than you can handle, he says. “They take $15,000 or $25,000 at 2 or 3 percent interest. But as soon as they default outside the bill, they’re at 25-30 percent interest. Then they become more concerned about making those credit card payments than running the business.”
6. Reel in your ego. Semrad says too many founders spend their startup funding unwisely, like the solopreneur who justified renting office space instead of working from a spare bedroom or startup incubator because he was a "senior executive," even though he had no clients yet. “I see people paying themselves high salaries, buying new instead of used computers, and renting and furnishing nice office spaces when they don’t even need to see clients there,” Semrad says. Burning through cash on any but necessary expenses is the quickest way to wind up in a bankruptcy attorney's office.
7. Strategize to grow, not to sustain. "As a business owner," Semrad says, “I’m not here just to maintain my standard of living. I want to grow. Put yourself in a position so that when you see that opportunity to grow you can take it. Now is not the time to go out and buy that second home or new car.” Your business will take care of your personal goals eventually, he says, but you have to put everything into growing the business first.
8. Know when to cut bait. If you’re taking out loans to pay your people, you need to ask if it’s a Band-Aid or a solution. Semrad asks, “Are you borrowing to make payroll because you don’t want to be embarrassed this week? Are you adding on debt to make one more payroll, instead of making the right decision to let people go?” It takes a smart entrepreneur to know when it’s time to throw in the towel.
The good news is, Semrad says most small business owners who are desperate enough to come to him for help don’t actually need to file bankruptcy. “I sit down with them and go to their place of business to see how they can cut costs," he says. "We put together a budget. Four or five years later, they’re not in the same situation because it was just a symptom.”