02/24/14

Funding a Startup? Brace Yourself

There’s nothing easy about capitalizing a startup. Funding a startup takes creativity and thick skin. Only about two percent of small business owners are able to convince a venture firm or angel investor to jump on board, and few others are able to go to the local bank around the corner and do much better. Most budding entrepreneurs end up doing what I’ve done, they either access the equity in their home or decide to bootstrap until their business becomes profitable. Some industries, like construction, landscaping, or similar businesses are able to leverage sweat equity to get off the ground, but it isn’t practical for everyone. That said, there are small business owners who will make it possible for a budding entrepreneur to work their way into ownership of an existing business.

Nevertheless, there’s nothing easy about funding a startup.

It helps if you have a little money to make more. When I was younger, I remember watching the 1986 NBA Slam Dunk Champion Anthony “Spud” Webb. At five foot seven, I don’t think anyone could have predicted a career in the NBA, let alone the career of a superstar. Although Spud had an incredible vertical leap and a successful career at the Atlanta Hawks, he never started as center.

Over the last 30 or more years I’ve known many small business owners who have bootstrapped their way through slow growth and built very successful companies. They never made the Inc. 500 and were never multimillion dollar enterprises within the first couple of years, but they started some very successful Main Street-type businesses. Just like Spud, they’ve had great careers, they simply would have never started as a center for the Lakers or the Knicks.

In some circles, the ability to find capital is the price of admission for an entrepreneur.

When I speak with lenders, they all want the same basic information from a borrower:

  1. Are  your and your business a good risk. When less than half of small businesses that start today are still in business five years from now, if you want to borrow money for your small business, you need to demonstrate that you are a good risk to take. Part of this is your credit score, another part of this is showing up with a credible team to be successful at your business, showing income sufficient to make regular payments to the bank is yet another way to show you are a good risk. Like you, lenders are in business to make a return—regardless of whether they are a  bank or non-traditional lender. If you can show the lender how they can make a return with you, you’ll be more likely to get the loan.
  2. Does your product or service fill a market need that isn’t being met by someone else in the market? In reality, this idea could probably be included in the bullet above. If you can demonstrate that what you want to do will fill an unmet need and you will have customers to buy your product or service, you’re more likely to find success with a lender. An equity investor like a venture capitalist or angel will likely be willing to put off a return for a date in the future, but if you are looking for a loan, you’ll need to demonstrate that the money you need will create enough of a return that you’ll be able to make the loan payment when it’s due—likely next month. If you can’t do that, you probably won’t get a loan.
  3. Do you have a contingency plan? This is something nobody wants to think about. For a startup, you want to demonstrate that you have a plan should something not go as hoped. If you can demonstrate to the lender that you will still be able to make your monthly payments, even if things don’t go as planned, you’re more likely to find success getting a loan.

The harsh reality is that most startup entrepreneurs have much more faith in their success than the average lender or investor. As a result, they’ll need to be more creative in how they find financing. Last year (2013) Pepperdine University’s Second Quarter Private Capital Index identified that 71 percent of small business owners turned to friends and family to fund their startup. Grants are another source of capital depending upon the type of business you’re starting and where it’s located.

I was surprised to learn how many businesses successfully barter for the resources they need. The Pepperdine study referenced above suggests that 57 percent of small business owners use trade credit to finance their businesses. A strategic partner within you industry might be a good place to look for that. And don’t forget customer funding. Many small business owners are able to partner with major customers to access the capital they need to grow.

Financing a startup is one of the most challenging things a startup entrepreneur will have to do. It’s definitely not for the faint of heart.

Of course there are those young entrepreneurs who are able to go on the Shark Tank and find the cash they need to grow and an equity partner to help them do it. Unfortunately, it’s a very small percentage of the people who get on the show, let alone the 30 million or so small businesses out there. With that in mind, take heart, prepare your plan, make sure you can explain to a potential lender why you are a better risk than the next 10 or more entrepreneurs he or she will see this week, and you might find the funds you need.

Click HERE To learn more about peer-to-peer lending

Click HERE to learn more about manufacturing loans

Learn more about using credit cards to finance your business HERE.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

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