Wednesday, May 17, 2006

Millionaires Who Started Out With Nothing, Part II

Tara Krapes Story

Tara Krapes, 33, has a business that made at least $2.5 million in sales by the end of 2004. Not bad, considering she began her company in 2002 with $1,050 from her own savings.

Vesta Executive Housing, based in Cincinnati and named for the Roman goddess of hearth and home, offers executives temporary housing for 30 days or more. Krapes has relationships with 42 top-notch apartment complexes in the area. When a client comes to Vesta, Krapes either has space ready for them, or, more often than not, she has to lease a new apartment for 12 months and hope that after her tenant leaves, she can fill it quickly. She almost always does—she currently has zero vacancies.

It seems impossible that she could have funded this business—with 12 employees and a second office in Lexington, Kentucky—with a paltry grand. Until you learn how she did it.

It helped that Krapes had experience in her field already. All she needed was one customer to begin, she figured. Once she found one, she signed a lease at an upscale apartment complex and paid the first month's rent—$1,050. From then on, whenever she worked with any client, she always asked for the money upfront.

Krapes would invest the money back into her business by purchasing furniture and other necessities for the living quarters or her company. And the more apartments she would rent from a complex, the cheaper the rent and the more revenue her company could pocket.

But most important, by coming up with a formula that allowed her to always get her money first, she says, "We avoided cash flow problems. From that $1,050, we've been able to grow very fast. We've never had any debt or loans." Krapes quickly took on two partners, Paul Pelnar, 39, and Joel Makela, 30, friends and colleagues who both had experience that she didn't. They were also able to contribute some other items, like computer equipment, but no money.

"Eighty-five percent of people get their money from savings or the three F's: family, friends and fools," says Sutton Landry, director of Northern Kentucky University's Small Business Development Center in Highland Heights, Kentucky. "For the [others], some kind of bank loan is involved. Very few people get VC funding or angel funding."

If you're wondering what the "slam-dunk qualifications" are for getting a big bank loan, Landry reels some of them off: "Typically, it's someone who is between the ages of 35 and 50, college-educated, and who has a net worth of a quarter of a million dollars—plus a Beacon [credit] score of 700-plus—with a business plan. It almost doesn't matter how good the business plan is, as long as they have one. Ideally, they're going into a business where they have five to 10 years of experience—half of it in management. Most banks will look at that type of profile, do the credit scoring, and say 'Yeah, these people would rather die than not pay a loan back.'"

But what if you're 26, utterly broke, and wishing you had gotten an MBA instead of a degree in American folklore? Landry says if your credit is halfway decent, you might be able to find somebody to cosign a loan—and "you'll need a business plan, a good business plan," he says.

Beyond that, you're simply going to have to rely on that can-do spirit. "Starting your own business involves sacrifice," says Landry. "Unfortunately, we're not a society that's much interested in sacrifice. But on a practical side, that's how most startup businesses begin. They start part time, and they're constantly re-investing money into the business. It's the same model that a lot of immigrants have when they come to this country, where people work three jobs to build the savings they need. But instead of getting a second job, you're running your business in the evenings and on weekends."

Krapes echoes that thought. She had one serious cash crunch when she discovered how few people need housing during the end-of-the-year holidays: "We didn't pay ourselves for a few months."

More on this subject

The Complete Idiot's Guide to Making Money with Rental Properties