This week, we’re going to talk about Capacity. The questions most lenders ask when trying to determine capacity centers around revenue. This is what makes it so challenging for start-ups and idea-stage companies to get a loan.
Regardless of whether you have an excellent personal credit score lenders want to see that you will be able to repay the loan. Even if you have excellent credit, but have no business income, it might not be a good idea to roll the dice by assuming debt. Having been through the start-up process a couple of times myself, and leveraging my personal credit, I know how important it is to have a means in place to meet that monthly obligation. This is particularly true for idea-stage companies with no viable product. No product + no revenue = an inability to repay the loan—severely limiting your options.
I’ve spoken with a number of entrepreneurs over the years who complain that bootstrapping takes too much time and working a second job while getting their small business off the ground takes a toll too. Having done both, I concur. There are options for finding start-up capital for companies without any revenue, but there aren’t very many:
- Access personal savings: This is a very common practice for starting a new business. After all, why would anyone else (banker or equity investor) invest in your company if you aren’t willing to do it yourself?
- Friends and family: According to the recent Pepperdine Private Capital Access Index for the second quarter of 2013, it reports that 71 percent of the small business owners they surveyed found success with friends and family.
- Angel investors: If you watch ABC’s Shark Tank closely, you’ll notice that the businesses they go for are the highly scalable business. Those that have the potential to grow fast and have a lot of mass-market appeals. Very few Main Street businesses fall into this category. You’ll also notice that even the Shark Tank investors aren’t too keen on investing in ideas that don’t already have revenues.
- Venture capital: Like angels, if you’re starting the right kind of business, you might be able to convince a venture capital firm to invest in your start-up in exchange for equity, but even VCs like to see revenue, if not profits before they’ll seriously invest in your small business.
Of course, you can access your home equity or personal credit cards, but that that doesn’t mean it’s a good idea. Unless you know you can make the payments, I wouldn’t suggest you put your home at risk. And, if you can’t make the credit card payments, you put your personal credit score at risk which could hurt your chances of accessing credit down the road when you’ll really need it. In a nutshell, just because you can don’t mean you should.
The third ‘C’ is an important one you can’t afford to ignore, but many budding small business owners have so much hope flowing through their veins, they forget this one. Don’t forget the story of the tortoise and the hare, slow and steady wins the race. I know there are cases where someone rolled the dice and won, but those stories are the exception rather than the rule.