In This Chapter

After a few years in the business, you may decide, as I did, to open your own mortgage broker company. I’d worked as a broker for six years before buying my company, Financial Access Corporation. What’s the secret to an easy transition from employee to owner? Increasing my responsibilities in the office as I continued working with my clients. So over time, I formulated the company’s marketing plan, expanded the referral network of realtors, developed the corporate operating budget, established new lender relationships, and finally, took responsibility for all the bookkeeping and payroll. By the time I signed the papers that officially transformed me into owner, I had a fair amount of experience of running a company under my belt.

In this chapter, we’re going to look at what steps you need to take if you’ve decided that you want to add “owner” after your name. If you have the opportunity to get some on-the-job training in your current office, so much the better. If not, you’ll find here a broad outline of how to develop a compelling business plan that will convince lenders they should help finance your company. We’ll talk about some of the essentials that you need to consider before you open your doors for business.

Working on commission is good training for being an owner. You already know what it’s like to be dependent on your own efforts for your earnings. There are no salary guarantees for a company owner—just like there are no guarantees for a mortgage broker. Taking a calculated risk doesn’t scare you. If you wanted safe and predictable, then you wouldn’t have gone into this career. And that willingness to trust your ability to make it work is one of the important characteristics of successful business owners.

Answer these questions and see if you’ve got the goods to be a company owner:

If after answering these questions and carefully considering the implications you’re still interested in opening your own business, the sections that follow describe what you need to do.

You need a business plan. It will help you focus your energies on the nitty-gritty details of creating a business, as well as give you a broad perspective of your short-and long-term goals. This same information can be used for a loan proposal when you approach lenders for funding.

While you may be someone who can keep a running list in your head, mentally checking off each item, that’s not enough for this purpose. You need to do thorough research and then compile the information into a printed report.

There are five parts to a business plan, but each section has multiple questions that you need to answer. Expect to take several months getting the data you’ll need. While you may veer somewhat from what you propose, the numbers and rationale need to make sense to a lender.

The sections are:

In this section, you begin the most important sales job you’ll have. You will make the case for yourself as an entrepreneur, and the need for another mortgage broker firm in your community. There are other firms, both local and national franchises. You have to explain why your mortgage firm will be different—and more importantly, why it will succeed.

You need to make a convincing case that you can reach the clients, realtors, builders, and contractors, who will support your mortgage broker business.

You’re going to have to crunch some numbers. These can’t be estimates. You need to develop a detailed monthly operating budget for the first year. That means researching how much you’ll spend for rent, taxes, salaries, office materials, marketing, and so on.

You will need to describe the specifics of the company operations.

Like the term papers you did in school, you now need to sum up your case.

Once you have completed your business plan, review it with owners of other established businesses for their input and advice. Or you can contact a counselor at the Service Corps of Retired Executives, www.score.org, or the Small Business Development Center for your state.

You need money to start a business. Even if you are confident that you will immediately have a steady stream of clients, it generally takes three months from application to closing and commissions aren’t paid until the closing. There are a multitude of up-front costs. You’ll need to lease space, furnish it, buy office equipment, pay legal and accounting fees, licenses fees, employee benefits (including your own), and much more.

You may be able to tap your own equity for start-up costs, but it’s unlikely to be enough. You could also approach family and friends for loans, possibly offering a small stake in the company as collateral. Once you have developed a budget and projected your expenses and income over a year, it will be clear exactly how much you’ll need.

The Small Business Administration offers several loan programs to assist small businesses. In most cases, the SBA is primarily a guarantor of loans made by private banks and other institutions. You may be eligible for a Basic 7(a) Loan Guaranty, which is the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds can be used for working capital, furniture, and fixtures, and the loan maturity is up to 10 years for working capital. It’s delivered through commercial lending institutions. Check the Small Business Administration website, www.sba.gov/financing/fr7aloan.html.

Most small business owners borrow start-up money from a commercial bank, but it’s a hard sell and you’ll need to be prepared. You’ll use your business plan as the basis for your loan proposal. Since there are different formats for loan proposals, contact the lender to see what they use.

In addition to the information in the business plan, you’ll also need to provide …

Lenders typically consider the 5 Cs of credit when making a small business loan. Each element is important but may not have equal weight when the lender is making the final decision on your particular loan. For example, if the economy is in a downturn and the housing market has slowed significantly, they may be less interested in a loan to start a mortgage broker company, even if you have a stellar credit rating and proven record of success as a broker. The 5 Cs are:

If the bank says yes, then congratulations! But if the lender turns you down, don’t take it personally. You can approach another lender with your proposal. But do take the time to ask the lender the reasoning behind the decision. It may help you strengthen your proposal for the next lender—or rethink your strategy for the business.

Your assets carry different values when used as collateral to secure a loan. The following table shows how lenders and the Small Business Administration value the collateral you pledge for a loan.

The bank will calculate your collateral coverage ratio as part of the loan evaluation process. This is calculated as follows: total discounted collateral value/total loan request.

I bought the mortgage broker company where I’d worked for six years. It had been a family business, so obviously that made some difference. But a strong argument can be made that buying an existing company makes a lot of sense, especially if it’s one that has a good reputation in the community.

The following are advantages of buying a business:

The following are disadvantages of buying a business:

You’ll need to compare the costs in terms of time, energy, and money, to see if you want to start from the beginning or buy an existing mortgage broker company. If you decide to start your own firm, can the area support yet another mortgage broker company?

When you were considering your first mortgage broker job, we talked about the need for health insurance. I said that if it wasn’t being offered, it might be the deal breaker (unless you get coverage from another source). Especially when you’re first starting out, paying the total costs for your own health insurance can be a huge chunk out of your limited income.

Now that you’re starting your own business, you can’t afford to let your coverage lapse. But you also have to have other insurance policies for yourself and your business.

The Least You Need to Know