To provide sound advice for this article, I interviewed Tony Castellano, the former executive director of JPMorgan Chase. He has launched 40 businesses in his 40-year career, and is now retired from banking. He currently teaches classes in health and wellness entrepreneurship at the College of Lake County in Illinois and is the area manager overseeing the 2010 census effort for the state of Illinois.
JM: What is the best way for an individual to secure financing, either to start up a new massage practice or to expand an existing one?
TC: The best way, and it's not really talked about in many books about entrepreneurs, is called bootstrapping, and it means using your own money. It requires a lot of planning because you have to build up a financial nest egg to be used for cash flow until you have enough clients to generate sufficient revenue, and this is what I teach in my entrepreneur classes. When you first become credentialed, you may have to work for someone else like a chiropractor, a health club, a cruise ship or a resort hotel. As you increase your professional skill, you also save money.
Of course, that's easier said than done and it's the biggest reason why many massage therapists never get beyond working out of the health club or chiropractor's office. Let's face it, it's hard work, it takes a lot of time to give a massage and if you're working for someone else, they're probably taking a third to a half of what you make-all of which make it difficult to get your money. You may even have to take a second job outside the industry, like waiting tables, to help make ends meet. Just remember, if you do it right and budget appropriately, it's only temporary and it's necessary to fund your dream.
Now this implies you know exactly how much cash flow you'll need to sustain your practice until you can build up enough clientele to keep you going-and that means having a good, solid business plan.
JM: What are your thoughts on asking friends and family for funds?
TC: Assuming you have friends or family in a position to help, it might be a good idea. If you're in a relationship, you may want to discuss the idea with your partner and together try to find ways to tighten the belt.
JM: If you do go the friends-and-family route, do you suggest making it a formal arrangement with some type of written contract or would you look at that on a case-by-case basis?
TC: Case-by-case basis. It would depend largely on the family and/or cultural dynamics. If you can make it so that it's not a formal contract, that's one less pressure you have to deal with, the idea being you'll pay it back when you can. With that being said, you may want to write something down just to remember what the agreements were. One of the major downsides of this situation is you are clearly putting the relationship itself at risk, unlike using personal savings where if it doesn't work out, you're only out the money you put into it.
JM: You've talked about bootstrapping and friends and family. What other sources can you talk about?
TC: There's always tapping your collateral. The most obvious example is if you own a home and can get a home equity loan or maybe refinance your mortgage. The terms these days are generally good at 4.5 to 5 percent-but now you're putting your home, car or wedding ring at risk.
JM: What about credit cards?
TC: The drawback to credit cards is they're very expensive-15, 20 or even 30 percent-but they're very easy; as long as you have the line of credit already, you just take the cash. This gets a lot of people into trouble when they don't know how to use their credit cards wisely.
You can also use credit cards for working capital, which is how a lot of start-ups use them. That's not how they're intended to be used, but a lot of people do use them that way. And of course, the drawback is you're constrained to whatever the credit limit is on the card, whereas with a mortgage or home equity line of credit, you can access much more.
JM: What are some of the more creative things people can do to help finance their company?
TC: You can sell discounted gift certificates or prepaid packages, such as 10 sessions for the price of eight. This starts to crossover into creative marketing. There are all kinds of neat things you can do with this concept.
[Read "Build Your Practice with Massage Gift Certificates," by Diana Moore, for further details.]
JM: If someone were to go to a bank for a small-business loan, what is the bank looking for that would increase the chances of him or her getting approved?
TC: It depends if it's a start-up or an existing business. If it's a start-up, it's nearly impossible to get a small-business loan because there's no business yet. In that case, you would need a personal loan with some type of collateral and/or a co-signer. If it's an existing business, what the bank is looking for is the cash-flow analysis, financial statements and tax returns-in other words, all the documentation necessary, going back two to three years, to demonstrate to the bank that you, as a borrower, have the capability of being able to service the debt.
JM: Any final words of advice?
TC: One thing I stress in my classes is that whatever you do, it must be structured in such a way that you're taking in more than you're spending. I think a lot of people go into starting their company and they already have the condo bought and the storefront leased, but with no clients. This is why there is so much turnover in the massage industry. Entrepreneurs and sole proprietors are notorious over-estimators when it comes to how much money they can make, and a typical bank will probably discount projections by 50 percent, unless they have the documentation to prove they can pull in that kind of money.