Billboard Mastery Podcast: Episode 37

Bootstrap Borrowing

“It takes money to make money” – but where does that original capital come from? In this Billboard Mastery podcast we’re going to discuss the various options to raise money to build or buy billboards assuming you are just getting started and financing is hard to come by. As you’ll see, there are many options available to those who really work the system aggressively.

Episode 37: Bootstrap Borrowing Transcript

It takes money to make money. That's a great quote and everything, but how is that realistic? Where's the money come from to begin with to make money with? This is Frank Rolfe for the Billboard Mastery Podcast. We're talking about bootstrap borrowing, how you get into business, how you get money to start up from the beginning. Now we're going to go over a lot of different options here. And again, you have to fit the one that works best for you, you have to understand the risks on them. I'm not an accountant, I'm not an attorney, but just want to give you some ideas to explore on your own personal journey of how to get the capital to get into the billboard business or really any business.

First, let's talk about the world of banking. Because, you know, typically, if you can, you want to get banking on a billboard, you want to get the money borrowed, least at some percent, maybe 80% of the price or 70% of the price. You want to bank to carry the big weight to do the heavy lifting. So what are your options there? Let's start at that point, and then work our way back to capital. Well, you have really two options in the marketplace to get someone who will extend you the credit, to buy or build a billboard. The first one is the classic traditional bank. So a bank, whether it's a credit union, or a bank, whether it's a neighborhood bank, or a regional bank, a bank is a good place to start. Now, what is the bank want? A bank is going to require you to have some capital down, some skin in the game, I've never seen a 100% bank loan in my entire life.

However, there's a second type of banking out there if you're looking at buying an existing billboard. And that is called seller financing. Now sellers are allowed to do whatever they want to do. So if they want to do 100%, financing, 0% down that's perfectly legal for them to do that. It's rare. I've done seller financing on signs I bought before, even from big companies. I bought some signs from what is now Metromedia, and now Clear Channel, and they carried paper on them. Why? They just want to get them out the door, they didn't really care. It wasn't really a money making idea for them, it was just a matter of convenience. They knew it'd be really hard to get a loan on them. And so the signs were in bad shape, they were abandoned. And they just said, "Okay, here's the deal, give us down just a portion, and we'll go ahead and carry it over a multi year period." So the bottom line is the only way you can get into the billboard business at zero money would be to buy signs from a seller who will carry the paper with zero down.

But let's all admit that's really, really rare. So by and large, you have to have capital, if not the capital for the whole thing then at least a capital for the down payment with the bank. So that being the case, where do you get capital? Well, the way I got into the business, of course, was using credit card debt. But that's a terrible idea. That's very risky, very, very high interest rate. The idea is you take your credit card, you draw down your credit card balance. They even send you checks periodically saying, "Here, deposit this check." The problem is interest rates can be up there at 20-30%. But maybe you've got something that's lower. But that's really risky lending, that's kind of stuff that only young people like myself did back when you're in your early 20s, when you think you're bulletproof, and you figure if it all goes bad, you can basically go bankrupt and reinvent yourself later. So that's, that's risky stuff.

Another way you can get the capital is to sell ground leases and permits. This is actually a very good idea, because you earn while you learn. You go out looking for billboard locations, you find them, you get permits on them and ground leases. And then you sell that to larger companies. Done a ton of those over the years, always for really good money. I don't think I ever sold one for less than five grand, and I sold some for as much as 50 and 100 grand. It's a great business model. But the problem is often when you get those, you know, you really don't want to sell them, you want to keep them and build them yourself. You want a lifetime of income, not just you know, one whack early on.

So what that all leads you around to is probably the best source to bootstrap capital, and that's friends and family. Now, why would friends and family want to be your bank? Why would they want to loan you the money down or maybe even loan you the entire amount? Well, they're not going to want to do it unless you apply the following concepts in your pitch to those friends and family. Number one, you need to approach them correctly. Don't go for huge amounts of money for starters, it makes them very, very uncomfortable. And you have to look at everything from their opinion and all they care about is am I going to get my money back. Because before you have return on capital you have to return of capital. So they want to know, okay, can you actually really truly get my money back and how? And then you got to give them some rate of return attractive enough to make them want to carry the financing for you.

So normally the way these things are constructed, there's basically three parts of the puzzle when you're working with a friends and family member who wants to go ahead and loan you the money for either the down payment with the bank, or loaning the entire amount. The first one is you have to have acknowledgement and the number one position is the amount that they loaned to you. So before there will be any distributions of any profits or any profits at all, that money must go back to them. Their capital must be held sacred, and fully separate from everything else. So the priority of payments, if you had a bank loan, for example, would be the bank loan, and then their capital. And if there's no bank loan, then their capital, but they need to know that you understand and appreciate that the capital they're putting in is absolutely essential to the whole concept, and they are definitely going to get their money back. Nobody likes to lose their capital, you can have it not make any rate of return. But losing capital is a quick way to go bankrupt and nobody wants to get involved with that stuff.

Number two, you have to offer them what's called a preferred rate of return. This is interest being earned other capital, whether you make it immediately or not, at a minimum accrued to them. So let's say you say to them, "Here's the deal, if you'll go ahead and loan me $10,000, I can build two wooden billboards for that $10,000. And I am going to make sure you get your capital back, that's the number one priority, no matter what happens, we've got to get your capital back. And then I'm going to go ahead and give you an interest rate of 6% on that $10,000. So that means I'm going to go ahead and pay you $600 a year, $50 a month, no matter what happens here." Now, that's appealing to them, because number one, it means you understand how money works. But number two, you're acknowledging that they have what is called opportunity costs or lending you this money which they did not lend to somebody else, or put in some other investment in you are thereby giving them this rate of return, that's higher than they can typically get the market. And they're going to sure get it. So now what happens is it when you go to ultimately sell the signs off or whatever happens, they get the capital, they get the preferred rate of return.

Then what comes after that is the profit splits. Now, that's where it's up to you on how you want to do it. Some friends, a family member, or just perfectly happy getting nothing more than their preferred rate of return. And that's it. But yet others they don't want to do the deal unless there's much more riches involved. So they want to see that at the end of the movie, let's say you have a 50/50 profit split, every dollar you get beyond their preferred rate of return to the capital is split 50%, half to them and half to you. It doesn't have to be that way. I've seen splits as little as 80/20 or 90/10, where you get the 90 and they get the 10. But the bottom line is those are the three parts of the puzzle. Number one acknowledgement of this, the sanctity and the importance of their capital. Number two, the preferred rates of return. And then finally, the profit splits.

Now where a lot of people blow it on friends and family is they think they should give you some kind of special brother -in-law insider deal because they're your friend or your family member, that's a real turnoff to them. Because they feel like you're using them sort of, they're not really very excited, therefore about doing it. The worst thing you can do when you're borrowing money from someone is to have them feel any less than really excited about it. So to get them involved, sell them on the enthusiasm of what you're doing, show them exactly what's going to happen. Show them your worst case, best case, and realistic case scenario. The worst being what would happen if everything went wrong, the best of everything went right and realistic somewhere in between, because that'll give you the best idea of how much money you're going to make. And it makes them happy that you've thought through all of the different scenarios.

The bottom line to it all is always think like the person that you're borrowing the money from. So as long as you approach every situation, thinking to yourself, not what you think but what you think they think, and what's important to them. That's when you really turn the corner and that's the kind of person who's able to bootstrap capital up all the time. This is Frank Rolfe for the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.