Small business start-up capital is a highly sought after commodity as more and more people are trying their luck at self-employment. Statistically, the odds of small business start-up success is less than 20% within a 5 year period.
A large part of the reason for getting your loan request turned down, and the basic reason startups end up failing in large numbers in the first place, is the mistakes made when seeking financing.
Here are my top 7 small business start-up capital 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.
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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 for 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.
Mistake #2 – Purposeful Business Plan.
For most small business start-up money, a business plan is a required part of the application.
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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.
A business plan should always 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 achieve greater success, faster.
Mistake #3 – Poor Working Capital Projections.
Start up situations tend to intensively focus on the assets they need to acquire, space they’re going to lease, the leasehold improvement cost and other initial expenditure outlay required to get the business up and running.
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What tends to be either missed entirely or poorly estimated is the realistic 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.
From the financier’s point of view, they want you to be able to clearly articulate what you’re going to do and why it’s 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 is 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 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 your business can follow along.
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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 go 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 the 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.
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 mere seconds to loose any realistic chance of even being seriously considered.
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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 also 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.
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.
About The Author:
- Pros and Cons of Financing a Business
- How to Raise Money to Finance a Franchise
- Book: The Last Chance Millionaire
- 10 Rules for Starting a Business on a Shoestring Budget
- No-Cash Strategies to Start or Grow a Business