I often hear aspiring entrepreneurs complain they cannot get funding for a business startup. While it is difficult to obtain funding, it is not impossible.
There are lenders willing to make startup loans, especially if the Small Business Administration (SBA) is willing to back up part of it.
But you need to understand startup businesses are risky, and lenders know this. If you want to acquire funding, you must be able to effectively communicate to the lender why and how your business will be successful enough to pay back the loan.
The management team
Lenders want to see evidence the management team is capable of operating a successful business. They want to know what experience you and your partners have in the type of business you are starting. This is no time for on-the-job training.
Lenders want to know what skills and education you have that will help you manage a profitable business. You may be an experienced auto mechanic with excellent repair skills, but what type of business training do you have?
Are there business skills and experience you have acquired working in or managing other businesses? Can these skills be applied to your new business?
The business plan
Lenders want to see that you have put serious consideration and planning into this startup. They want to know you have not overlooked potential obstacles. You need to develop a business plan that maps out how you will make your business profitable and make the loan payments.
Your business plan must show you have a realistic grasp of the financial requirements and financial potential of your new business. Have you developed a thorough and accurate list of the costs of startup? Can you show the lender how you came up with these costs?
Have you developed financial projections with a solid basis? Lenders need to see you have made realistic assumptions based on your relevant experience and research. Your projections should show the business can achieve both profitability and positive cash flow.
Lenders are particularly interested in seeing you demonstrate that you understand your target market and your competition. Be able to describe the type of customer who would be most likely to purchase from you and what would motivate them to purchase.
Never tell a lender you have no competition. They know better. Even if the type of business you are starting is new to the area, your potential customers have alternatives to buying from you.
Be able to discuss these alternatives and compare your business to them. Illustrate your competitive edge — why will customers choose you instead of these alternatives?
Your financial situation
Lenders will want to know about your current financial situation. An excellent way to show you can manage the business’s finances and pay the loan back is to provide evidence you successfully manage your personal finances.
Have you been able to set aside some money to invest in the business? Lenders typically like to see you come up with about 25 percent or more of the startup funding.
Have you been able to establish good credit? Lenders want to see that you have a record of borrowing money and paying loans back on time. They are usually looking for a credit score of at least 650.
If you have not already done so, you need to obtain your credit report to be sure there are no inaccuracies and so you can address any problems before you see a lender.
Have you been able to accumulate personal assets you can pledge as collateral for the loan? The reality of collateral is lenders want to know what they can take away from you and sell if you don’t pay them back.
Many times personal assets must be pledged because assets purchased for the business typically do not provide enough coverage. Do you own a home or other real estate you are willing to offer as collateral? What other personal assets can you offer?
Lenders know there is a lot of risk involved in starting a business. Even if you are already in business, lenders typically consider any business that has been in operation less than two years a “startup” where risk is concerned. So before you see a lender, be prepared to show your business has a good chance to be successful and pay back the loan.
Connie Edwards is a business consultant with the University of Georgia’s Small Business Development Center. Contact her at 912-651-3200.