Startup financing advice

[M5]

A little background: My wife and I have been trying to figure out what to do with our lives for quite some time now but to no avail. We currently soak up $110k/yr combined and could easily be FI within 10 years. BUT, we both hate our jobs, especially me. I feel like I just waste my life away staring at a computer on a daily basis. We've come to the conclusion that wasting away at a miserable job simply to FIRE by 35 or 40 just isn't worth it. We definitely want to be FI, but without sacrificing our quality of life. And unfortunately even all the great extracurricular things we get to do doesn't make up for a miserable work environment.

So.. we've decided to move back to the Midwest later this year and take on a new adventure and risks. My wife wants to use my education benefits to get her culinary certificate and pursue that passion while I plan to open my own dump trucking business. While my current job has nothing to do with trucking or the construction industry, I have several years of previous experience operating heavy equipment and driving dump trucks, end dumps, concrete mixers, etc. and thoroughly enjoy it.

This is where things start to get a little tricky since we have a fairly unique situation. A previous employer has agreed to hire me out as an owner-operator once I get going and this will provide reliable income for the business. Having worked for him in the past, knowing how he operates and the size of his company I feel confident in this decision. But, as many know, the biggest initial expense and barrier is purchasing the truck itself. I have set a budget of $60k for this but am unable to pay cash for it. Nor would I want to since this type of business requires excess cash on hand for repairs and maintenance.

I've talked to a few lenders already and the best deal I've found to date is a 60 month equipment loan with 8.5% interest requiring 15% down. This would put me at about a $1050-1100/mo payment. The issue we're trying to figure out is the best way to secure this note with our personal finances since a startup has no income history to use and we'll be moving back right before starting it. This means my wife won't have much income history with her new job when we move back. For those that have experience with this type of thing, are there other creative ways to secure this? I will probably use this same bank for the business checking account, is it possible to show an excess say 6+ months of payments in there as a replacement for stable personal income to cover the truck payment? I've done my research on my business model and run the numbers, so please no negative comments on my choice. Besides, that's not the entrepreneurial spirit!

[AnonymousStash]

A huge move and a new business with that much debt would make me nervous.

Is it possible to buy a used truck cheaper to get you started?
At 110K/year how long would it take to save up the cash?

[M5]

A huge move and a new business with that much debt would make me nervous.

Is it possible to buy a used truck cheaper to get you started?
At 110K/year how long would it take to save up the cash?

That price is a reliable used truck. Anything below 35-40k is going to eat you alive in repairs. For reference a brand new one would be 200k  I'm also needing a truck with at least 4 rear axles for my application which drives the cost up a bit  We will also be moving back into a house we own that we've been renting out and has a $400/mo mortgage so not too worried about that.

Gross income would be $130-160k/yr and $60-80k in expenses. That number includes the truck payment.

[walkwalkwalk]

If you search the entrepreneurial sub-forum here, there was a guy that was going to purchase a truck and his brother was going to be the driver for it. Maybe check that out.

[brooklynmoney]

Can you tap any friends or family? My friend opened a business and did that. It was all very formal and they have a biz plan and also an SBA loan. Most people only loaned like $1k so it’s not a huge risk if it goes sideways.

[M5]

If you search the entrepreneurial sub-forum here, there was a guy that was going to purchase a truck and his brother was going to be the driver for it. Maybe check that out.

Thanks, I'll check it out and see what I can find.

Can you tap any friends or family? My friend opened a business and did that. It was all very formal and they have a biz plan and also an SBA loan. Most people only loaned like $1k so it’s not a huge risk if it goes sideways.

I have considered that, but my parents are the only family members who would even remotely entertain it. Deals with family usually get messy so we'd prefer to avoid that at all costs.

[skiersailor]

We will also be moving back into a house we own that we've been renting out and has a $400/mo mortgage so not too worried about that.

Do you have any equity in the house?  If so, then can you do a cash out refinance or take out a home equity line of credit against it?  The best time to get a loan is when you are currently drawing a predictable salary (i.e. now).  Banks have a difficult time valuing businesses as collateral or considering irregular income streams from self-employment.

[Proud Foot]

Is there a reason you cannot use the truck as collateral for the loan? Do you have any investments in taxable accounts? You could chose a bank that offers investment services and move enough of your taxable account to the bank to secure the loan.

[M5]

We will also be moving back into a house we own that we've been renting out and has a $400/mo mortgage so not too worried about that.

Do you have any equity in the house?  If so, then can you do a cash out refinance or take out a home equity line of credit against it?  The best time to get a loan is when you are currently drawing a predictable salary (i.e. now).  Banks have a difficult time valuing businesses as collateral or considering irregular income streams from self-employment.

Not enough to make a difference. Cheap house that was bought using a Rural development loan as our first house 5 years ago.

Is there a reason you cannot use the truck as collateral for the loan? Do you have any investments in taxable accounts? You could chose a bank that offers investment services and move enough of your taxable account to the bank to secure the loan.

Yes, the truck would be collateral but for some reason they seem to want to show consistent outside income on top of that that covers the truck payment and our other liabilities. We bank with USAA and I've recently discovered they'll give you a personal loan that has no max amount and no origination fees, just a slightly higher interest rate. We may consider getting approved for this while we're in our current jobs and using this as a work-around since we make plenty now to be approved for something like that.

[moneytaichi]

A huge move and a new business with that much debt would make me nervous.
Is it possible to buy a used truck cheaper to get you started?

I'd agree with that it's a super-risky situation with two big things going on at once. In fact, it'll be three big things, adding your wife's decision to change her job too. You are dealing more than your finance here...

Can you rent a truck to start on a smaller size? One guy's backing is not enough. What if he changes his mind, leaves his job etc.? If I were in your shoes, I'd think through the business plan carefully and run it by some really experienced business people like SCORE.org and Small Business Development Center. They give free advise.

Good luck!

[Fuzz]

I am not sure I understand the issue. You want to beat 8.5% on a 52K note? It's a 60K truck, you need to put down $9K, there are some financing costs.

So the total yearly interest is in the zone of $4K and you are currently making 110K combined?

Your biz is going to to do 130K to 160K gross on 60K to 80K expenses. Who gives a rip about the interest expense at that level?

Just get the note, buy the truck and solve the next problem.

Yeah, in terms of creative financing, I am a fan of 0% cards that you can pay back in 15 months.

But I think your real problem is getting customers and earning revenue. You're ahead of the game because you think you have the first customer. Great! Take whatever that guy told you and cut it in half. Can you still survive? You just stress-tested your business.

How could you make another 4K with your dump truck next year? Do you haul for GCs? Can you make a list of 10 GCs in your market and call them up? Then put a reminder in your phone to call them back in 3 months.

With a dump truck, I would assume you could make back that 4K interest expense in a weekend or three. I have no idea. You bill out at $160/hour? We are talking about an extra 25-30 hours of work to pay for the entire yearly interest expense of your businesses principal asset?

The hard part is getting customers and then keeping them happy. I think you're worried about the wrong problem. Let the bank screw you on a 50K note. In the scheme of your business, you're worried about reducing an expense from 3.5 and 2.5% of your projected annual revenue. Focus on making that money!

Mustachianism is great for optimizing expenses and savings. Running a small business pushes you to think about increasing revenues.

In my opinion and experience, in a small biz it is more valuable for the CEO to worry about increasing revenues than chasing down every possible expense. Yes you need to do both. But you really need to get comfortable with solving problems quickly--let's say you dick around and after a month reduce the loan from 8.5% to 6.5% and save $1000 next year. But it just took an extra month to shove that loan through, and you were projecting to make $15K that month...so that "savings" on the interest just cost you $14K.

I think a dump truck biz is a great business. Also, get appropriate insurance, separate biz accounts, pay your taxes, etc.

Also, take this with a grain of salt. Fun to rant on the internet about your issues. Good way to avoid my own :)

[M5]

@Fuzz finding the best deal isn't the issue, getting approved is. Startup financing is extremely tough to find since you have no cash flow record to prove you can make the payments. That's why they rely so heavily on personal income, which is a unique situation for us since we'll be moving back and not using our current income streams.

A huge move and a new business with that much debt would make me nervous.
Is it possible to buy a used truck cheaper to get you started?

I'd agree with that it's a super-risky situation with two big things going on at once. In fact, it'll be three big things, adding your wife's decision to change her job too. You are dealing more than your finance here...

Can you rent a truck to start on a smaller size? One guy's backing is not enough. What if he changes his mind, leaves his job etc.? If I were in your shoes, I'd think through the business plan carefully and run it by some really experienced business people like SCORE.org and Small Business Development Center. They give free advise.

Good luck!

No, the only time you can lease a dump truck is to use it specifically on a job site - think a big GC using it to move materials while building a warehouse. Even if I could that would be insane, basically like leasing a car. If I own it, at least I can sell it if everything goes to shit.

And once again, not worried about the revenue stream. This guy is the OWNER of the company with 35+ trucks, someone I've worked for in the past, and I'm also not the only person he brokers loads for. I am still working my own contacts to create business during the slow times when he has no loads for me

The biggest revenue variable is weather and downtime due to breakdowns. In a mild winter like last year I could work nearly every day, whereas this year I'd probably be sitting for a month or two.

Keep in mind I've run all my numbers based on the truck not moving and making zilch for 12 weeks, which is pretty much worst case scenario.