Wheat Into Dough

How a 20-Something Cobbled $1 Million
In Loans to Start a Restaurant Franchise

July 27, 2005

When he was 24 years old, Jeff Riggs wanted something extraordinary: $1.1 million.
That's the amount of money the Bozeman, Mont., resident hoped to borrow to buy an empty plot of land, construct a building and open the first restaurant franchise of Wheat Montana, a locally known farm that also operates a deli and a bakery.

Mr. Riggs had long set his sights on owning and operating his own business.
"In college, I didn't drink much," he says. "I'd sit in my room and watch the stock market."

But Mr. Riggs, now 27, did more than tune into CNBC. A business major who had received a basketball scholarship, he used the money his family would have spent on tuition to buy residential property and become a landlord in Bozeman while he was still a student. In doing so, he was able to establish himself financially and secure three loans that would give him the money to open the restaurant. After the business took off, he opened a second franchise in Billings, Mont.

A lot of twentysomethings share Mr. Riggs's desire to forgo a corporate job with its steady paycheck and guaranteed benefits. But while entrepreneurship can bring the chance for a big payoff, it also brings the risk of financial and professional meltdown.
Five years ago, it seemed as if everywhere you turned a twentysomething was starting a dot-com business with millions of dollars of venture-capital financing. Though they aren't in the headlines as much these days, many young people continue to forge paths as business owners. According to the U.S. Census Bureau, some 9% of business owners were age 34 or under in 2002, the most recent year for which figures are available.

Twentysomethings who decide to go it on their own face the same challenges as any business owner, from getting financing to getting the word out to potential customers. But they also have to work harder to earn people's respect.
"Sometimes as a young person, it's very hard to get people to take you seriously," says Arnie Abram, manager of alumni services for the National Foundation for Teaching Entrepreneurship, an organization that helps young people build business skills.

The inexperience of many twentysomethings in financial matters, combined with a lack of collateral, often means banks and credit unions will stamp denied on a loan application. "The number one issue is financing," Mr. Abram says.
So how do you try to convince the lender -- and yourself -- that your business can do well?
Develop a rock-solid business plan and find a mentor, someone who is already doing what you want to do and can show you the ropes, experts say.

"A business plan is a roadmap that tells the bank how you will be able to make enough money to repay the loan," says Neil Webman, a counselor with SCORE, a nonprofit agency in which retired business people offer free advice to new and would-be business owners.

The proposal defines your business, identifies your goals and serves as your company's first resume. Plans typically provide an in-depth outline for the company's finances, management and marketing. SCORE, for example, has chapters in most cities that offer free seminars and one-on-one counseling from former business owners on how to write business proposals and meet mentors.

Mr. Riggs knows all about the importance of a convincing and well-documented proposal. When he was looking for financing, he spent numerous hours trying to research every aspect of his proposed business. Once, he spent an entire day counting the cars that went by on Bozeman's main drag so he could have an accurate sense of the size of his customer base. Due to his age, he thought he had to go the extra mile when he was looking for financing.

"I wanted to be able to answer every question I was asked," he says. He also spent months with the family that owns the Wheat Montana, learning every facet of their operation.

But unlike Mr. Riggs, who had profitable real-estate investments he could leverage, most young people aren't going to start by taking out $1 million in loans, says Mr. Abram.

Rather, many would-be entrepreneurs start with small grants from nonprofits. Organizations such as the Trickle Up Program or the National Foundation for Teaching Entrepreneurship provide grants to help young business people get a start. Microlenders, meanwhile, are more inclined to take a chance on a new business than conventional banks, whose primary concern is to manage their bottom lines. These grants and small loans can range from a few hundred dollars, perhaps to make a prototype, to loans of tens of thousands of dollars to set up shop or expand.

Besides private loans, there are also federal loans, often backed by the Small Business Administration. Usually the government agency pays the bank 80% if the business defaults on the loan, Mr. Webman says.

Banks run the risk of losing the other 20% so they are unlikely to lend to a business unless the owners have enough collateral for the bank to recoup its losses or the business appears to have a good chance of being successful, Mr. Webman says. "The bank wants to know you are able to produce enough income to pay it back."

Another option that many young people turn toward is help from family and friends. Having a parent co-sign a loan can make all the difference.

It did for Gema Gamez, a 25-year-old who has owned and operated her own hair-extension salon, where one can buy hair-extensions and get them applied, in New York for the past two and a half years.

Her parents co-signed the loans that she took out to open her store, G&G Hair Extensions. She needed money to rent a space, buy equipment and human hair and pay her employees.

Ms. Gamez spent three months learning the ropes from a mentor who ran another hair-extension salon before Ms. Gamez opened her own business.

"I learned every aspect of the business," Ms. Gamez says.

That paid off. Ms. Gamez started with two employees and now has 11.

Mr. Riggs's preparation has also paid off. The expenses he predicted on his business plan turned out to be right on target, while his revenue exceeded his initial estimates, he says.

The early success allowed him to double the number of employees to 40 when he opened his second franchise, and he has a third restaurant set to open soon.

"My goal is to have four stores when I'm 30," he says.