7 Small Business Start Up
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Needless to say, it can be quite a change for a would be entreprenuer to pry any amount of cash out of a prospective lender.
Seriously though, if you were a lender, would you approve a loan for small business start up money knowing that there's an 80% chance you may not get it back? Probably not.
And even though there are government programs and grants in place to encourage the placement of small business start up money by commercial lenders, there can still be long odds on getting the capital you need to finance your start up.
A large part of the reason for getting your loan request turned down, and the basic reason start ups end up failing in large numbers in the first place, is the mistakes made when seeking financing.
Here are my top 7 small business startup money seeking mistakes.
Mistake #1 - No borrower risk.
The biggest single mistake I see with people seeking startup capital is that they ask a lender for 100% of their capital requirements.
Basically, they're asking the lender to take 100% of the financing risk which in most situations will cause the lender to immediately and infatically pass on the deal.
Risk needs to be shared between borrower and lender. Startup situations, depending on their nature, typically require the borrower to invest anywhere from 30% to 50% of the total capital required into the deal.
A personal equity investment not only reduces the cost of borrowing but also provides some serious skin into the deal that indicates a strong commitment on behalf of the borrower. Government supported programs can provide exceptions to this rule with lower initial personal investment requirements.
But government sponsored programs still require you to service the entire debt and pay it all back, so you need to make sure you can manage a high debt load during the start up period.
Mistake #2 - Purposeful Business Plan.
For most small business start up money, a business plan is a required part of the appplication.
Fundamentally, this is an important requirement for someone getting into any business. Unfortunately, most borrowers look at this strictly as an academic exercise to get financing with the only purpose of completing the business plan being to satisfy a lender requirement.
Individuals will either blast through a business plan outline they found on the web or was provided by the lender, or if they have a few dollars, they will pay someone to prepare a business plan.
The end result is a product for the lender, but the borrower still doesn't have a plan that they intend to follow.
A business plan should aways be prepared from the point of view that the primary benefactor of the process of creation and preparation is the underlying business. If this approach were taken more often, start up situations would acheive greater success, faster.
Mistake #3 - Poor Working Capital Projections.
Start up situations tend to intensively focus on the assets they need to acquire, the space their going to lease, the leasehold improvement cost, and other initial expenditure outlays required to get the business up and running.
What tends to be either missed entirely or poorly estimated is the relistic cash flow required to operate the business until such time as the business can sustain itself on a month to month basis.
Part of the reason for this is a working assumption that the business will immediately be cash flow positive in the first month of operations. In most cases this doesn't happen, the shortfalls are financed by personal credit cards because of the lack of planned working capital, and the borrowers end up in credit card hell, paying high interest rates with potentially no way out.
Unfortunately, creating more realistic, and potentially conservative cash flows may indicate that you don't have enough money to actually get started, so the temptation is to be overly optimistic in order to make the numbers work, which statistics show is a bad idea more often than not.
Mistake #4 - No Real Marketing Plan.
For most retail and service start ups, the marketing plan consists of placing some advertising, offering some grand opening specials, and sitting back and waiting for the flood of customers. Advertising can be very expensive and if you don't know what you're doing, you can burn through all your available cash pretty quickly.
Finding out how to reach your market, and the related cost, before you start, is typically a key to start up success. Investing in cost effective marketing strategies is also a major advantage which can require some initial self education on basic small business marketing before commencing business operations.
From the financier's point of view, they want you to be able to clearly articulate what you're going to do and why its supposed to work along with the related costs. Lenders aren't typically any good at assessing marketing plans, but they can likely tell if one is missing or grossly incomplete/unrealistic.
One of the most powerful ways to support your marketing strategy and related tactics are with written orders or letters of interest, or letters of intent to do business with you once you open.
Mistake #5 - No Rationale For Key Assumptions.
Even if you have a plan and a realistic cash flow projections, part of being credible is articulating what you're attempting to do in a logical and clear to understand format so that someone who potentially knows nothing about you're business can follow along.
Financial projections are created based on assumptions, so what are the assumptions used, and why were they selected?
If a request for small business start up money is logical and contains well documented assumptions, it automatically stands out from the pack.
Be clear on how you came up with each and every number you represent in your application package and why you feel they are relevant to your business case.
Mistake #6 - No Expertise and Support Team.
One of the first questions that goes through any lender's mind when someone asks them for small business start up money is whether or not the person requesting financing has the knowledge, expertise, and support to make the business successful.
Too often, individuals do not document and support their own expertise relative to the business venture. This can be done through a resume, examples of previous related work experience, letters of reference, a list of contacts that can provide verbal reference, etc.
Outside of your own skill set, what type of team have you assembled to support your efforts? In many cases, small businesses can start out with no employees outside of the proprietor(s). But you can still have a virtual team which can include an accountant, bookkeeper, lawyer, marketing coach, technology service support, and so on.
By organizing your support structure in advance, you're demonstrating a comprehensive knowledge of what it takes to make a business survive the start up period and grow.
Mistake #7 - Poor Presentation.
The discussions you have with a lender and the information you provide to them either inspires them with confidence or turns them off.
It may take weeks to get a loan approval, but it can take meer seconds to loose any realistic chance of even being seriously considered.
Unfortunately, most start up requests do a poor job of providing a proper presentation.
Outside of the obvious need for good grooming, neatness, and punctuality, the presentation process usually falls apart because the presenter is not sufficiently prepared to impress the heck out of the lender.
But making a good impression is not just about being enthusiastic and confident in your delivery, its about being able to articulate the details of what you're trying to do and why it would be a good investment for the lender.
That's right, you're trying to convince someone else that they should give you their money and that you'll pay them back with interest.
In order to do that, you need to intimately know, by memory, all the specifics of your business plan, the funds you require and why, and so on.
Too often, individuals seeking start up funds do not prepare in advance for their discussions with the lender and just "wing it", potentially destroying any chance they might have had to get the small business start up money they were looking for.
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