Automobiles and other VehiclesAutomobiles and other Vehicles (How about Land) We need to get around – reliably! In your business, you use a vehicle and this vehicle is a legitimate expense. There are several ways you can buy your car. You pay cash, get a bank loan, or lease it. For that matter, many of your major purchases in the beginning can be bought through lease or loan, so now would be is a good time to discuss financing options. Loans versus Leasing Bank loans are one of the most common ways to get money to start a business. However, as you can imagine, what with the high rate of new business failure, getting a loan is not as easy as it once was. What do banks consider before they will give you a loan?
The bottom line is that they want their money back, so they want to know whether you have the ability to repay the loan. They will look at two things: the cash flow from the business, and any collateral that you may have. Cash flow is the amount of money that comes in the door. From those funds, you need to pay all your bills and service your debts. When you are just starting your business, cash flow is a prediction that you make as to how much money you will bring in. The bank will automatically discount your prediction anywhere from twenty-five to fifty percent. Collateral is something that you own that you will pledge. You are promising the bank (or whatever lending institution) that if you can no longer service your debt you will hand over the collateral to the bank. The second aspect that the bank will look at is your personal credit history. Did you pay your utility bills, credit cards, phone bills, and any previous loans fully and on time? Find out what your credit rating is and if there are any outstanding challenges to it; try your best to resolve them. Read the report thoroughly and make certain that all your personal data is accurate and current. If you have never had a loan, go now and take out a loan to buy something valued at anywhere from five hundred and one thousand dollars, and pay it off within a year. Doing so builds up your credit rating. All financial institutions want to make sure that you have some of your own money in the business, a concept called personal equity. If you have any equipment (business or photographic), furniture, a cars, and particularly cash, list them as part of your business assets. Banks want to see equity to debt ratio of not more than four. In other words, what you owe should be not more than four times that of what you own. We spoke earlier of collateral; financial institutions love collateral. Collateral is anything that can be sold to pay back the loan. By the way, the value of collateral is not based on market value. The banks discount everything anywhere from ten to one hundred per cent. Yes, that’s right, one hundred per cent discount – often they put no value on your car, office equipment, jewelry, or mutual funds. I would list them anyway to show that you have some sort of track record. In the event that you do not have enough collateral, the financial institution may insist on your having someone to co-sign, a person who agrees to guarantee repayment of the loan.
Finally, banks and financial institutions want to see that you have some experience in the business you intend to run. Taking courses, business as well as photographic ones, will be an asset. Go and get work experience at a photographer whom you admire and learn all that you can. Even sweeping floors and carrying camera bags affords you opportunities to learn some of the inner working of the photography business. Any experience is better than no experience.
Leasing, on the other hand, provides you with use of the equipment without having to come up with all of the capital or going through many of the hoops and hurdles placed in front of you by the banks when applying for a loan. The interest rates can vary, and often are quite competitive with the banks. In many cases, the interest rates that car leases provide are much lower than most financial institutions. Leases provide the same flexibility in their terms, and in some cases, more so than the banks. Where taxes are concerned, certain tax benefits often allow you to write-off the cost of the lease and the interest rate paid. Compared to claiming capital cost allowance on the value of purchased assets, leasing is more sensible in this case. Lease terms usually reflect fixed interest rates; also, this option doesn’t tie up your line of credit. Talk to your accountant when deciding to lease or purchase, and determine if when your after-tax cash flow is improved or hindered by leasing or borrowing. What is the disadvantage to leasing? First and foremost, you do not own the asset, so it cannot be shown as a fixed asset. Often the per-dollar cost of lease financing is higher than that of borrowing funds to purchase the asset, but this disadvantage can be offset by higher after-tax cash flow. Lease contracts often specify purchase options or renewal terms, thus limiting your flexibility. While we are on the topic of leasing, we should discuss the prospect of buying, renting or leasing space for your studio. As in other businesses, the old maxim of “location, location, and location” still rings true. Although there have been many good arguments for and against the location of your business is, the reality remains undeniable: if you have a good location it will definitely improve your chance for success. The key issue is that you must determine who your clients are going to be and what location (area of town) they will find most comfortable or find most convenient to do business with you. One of the wisest things that one of my mentors ever taught me was, “Chuck, when making a business decision surrounding money, you must always ask yourself whether you are doing this to save money or make money? If you are trying to save money, it will be short lived. But, if you will make money by doing it, it will be the right decision!”
Having learned this, I was offered this nugget of success by another of my wise mentors: “If you are ever in a position to buy, buy! God is not making any more land and real estate is Always a Good Investment!” And man, has he been right. I just wish that I had implemented that piece of advice much sooner than I did.
Before I leave these wise mentors and get back to what we were discussing, I do have just one more piece of advice. A third mentor told me that he didn’t care if he was paying $ 10 a square foot or $ 1000 a square foot. If it represented 10 per cent of his total budget he would be ecstatic to pay $ 1000 a square foot if he were making one million dollars a year! Guess what? He was! That is, he was making a million a year – but his rent wasn’t that high, so he was a very happy camper. The point of the story is this; if, as a consequence of the location you are going to be making more money, then, by all means, pay what is needed to secure that location. So, let’s go back to buying, leasing, or renting, the $ 64,000 question. Only you can decide what is best for you. When buying, you have a clear, concise, long-term mortgage payment that you calculate into your planning. If for one reason or another, you need to move, you can either sell it or lease it out. The associated costs of owning and running a commercial space also provide you expense deductions in the form of mortgage interest, property taxes, and other sundry fixed costs. This investment also gives you one heck of a good retirement fund; property is never going to decrease in value to any great extent.
What are your disadvantages? If your business is growing, you may need to get bigger space. Buying and selling business property can be a bit of a hassle. There are decidedly higher up-front costs such as property tax, appraisal fees, maintenance fees, down payments, and legal fees. Finding space or a building in the area you want may be challenging and expensive. Let’s look at leasing. Generally speaking, finding space in a good location is not too difficult. You will not have to come up with as much money as you would if you were buying. You may have fewer headaches than you would if you owned the space. The landlord has them. You can determine how long of a term you want. You can select anywhere from one month to ten years or more and negotiate any associated rights or renewal. What are the significant drawbacks? For starters, you are subject to rent increases and maintenance fees. Any leasehold improvements that you make to the premises, you must pay for, but the landlord subsequently owns them. Once the lease expires and there is no renewal clause, the landlord does not have to renew the lease with you. Any money you pay is totally expensed against you earned income, but, by the same token, does not build up any equity for you.
When you do decide to lease, what should you look for? First of all, figure out how much space you will need; entrance, workspace, camera room, finishing room, sales room, staff room, and don’t forget the bathroom. Look at a variety of different spaces before settling on the one for you. Bring others with you and get feedback. Knowing that you need to develop your space to your needs, and that any money you put into the building stays in the building, ask the landlord for several months free rent and ask if there is any possibility of a tenant improvement allowance. Make sure you know exactly what the terms are. The terms are details like the base rent, the amount you pay per square foot per month. How much is your portion of the “common area”, the amount you pay for hallways and lobbies if you are in a multi tenanted building. What is your share of the yearly property tax payments? Who pays for the water and the electrical bills? Don’t assume or take anything for granted, because doing so can be a costly mistake. Here are some terms to know: Straight, or flat lease = base rent per foot, which includes everything. This amount is stipulated in the “Lease Agreement.” Term = is it month to month, one year, or multi-year? Have it stipulated Triple Net = this requires a tenant to pay maintenance, taxes, insurance, along with a fixed rent every month. Sub-lease = the ability of tenants to rent all or part of the space to another person or company, but they are still legally responsible for all the space. Have a lawyer examine, and verify, all of your lease documentation!
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