Thursday, 15 November 2012

Financing Your Startup Business - Insights From a Career Lender ...

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I was out reading some small business forums yesterday as a way to keep abreast of the small business lending industry as well as see what issues small business owners were having in securing financing.

What I saw over and over again was numerous potential business owners ? some with completed business plans and some who only had an idea in mind ? that were frustrated with the fact that banks and other similar business loan providers would not even consider their loan request let alone fund it.
One poster on these forums had a completed business plan but could not even get a lender to return her call.

Another one, who just recently went through bankruptcy, was turned down by his bank because of a poor credit score.

And, another who was able to save some $25,000 to put into the business but was still turned down.

Why Does This Happen?

The reason is that banks and similar lenders just do not fund startup business. These lenders want to get repaid and thus they want to ensure that your business has the ability to repay them. Therefore, to determine if you and your business has the wherewithal to make future monthly payments ? they look to what you or your business has done in the past.

That is why they require past financial statement and tax returns. They figure if you have earned enough in the past to service the requested debt (earned enough in the past to make future monthly payments) then you should be able to do it again in the future ? and thus will consider your business loan request. But, if you have no track record ? they cannot make that determination and will decline your request.

While you and I might not like that ? it is the way it is. Banks and similar small business lenders do not fund startup businesses.

What You Can Do

However, having said all of that, hundreds of thousands of business get started each and every year in this country. But, very few, if any, do so via traditional business loans.

What they do is find ways to bootstrap their business. Most use some type of personal resources to get their company off the ground. Either through personal savings, tapping retirement accounts, using personal credit cards or even asking friends and family for small loans or investments.
Some new businesses have been able to leverage personal loan site like peer-to-peer lending or crowdfunding to get small amounts of capital and then start the business on a smaller scale and work it slowing based on the amount of capital they can raise.

In fact, I know of several people that worked full time and started their business (on a small scale) part-time ? using their wages to help fund the business. Then, as their companies grew, they were able to quit their day jobs and go full-time in their own business.

Others followed similar paths by seeking micro loans and growing their business slowly with those and other resources.?And, some have found local small investors in their community to help fund the initial stages of their new ventures.


The bottom line is this: Banks don?t lend to startup businesses and pursuing that route will only result in wasted time and huge frustration.

To truly fund your new business, you just have to find ways to bootstrap it ? via personal resources or by any means that you can to acquire the capital needed ? be it to start smaller, start online or start part-time. Then, as the business grow (gets that track record) then, other financing alternative financing options open up.

Most successful, new small businesses do just this. They bootstrap until they qualify for alternative financing. Then use those alternative sources until their businesses are positioned to secure bank financing ? kind of like stepping stones.

So, for those seeking to fund a new, startup business ? forget the banks ? and take that time and energy and research other options that will actually work for you.

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About the Author

Joseph Lizio holds a MBA in Finance and Entrepreneurship, is the founder of Business Money Today, has a strong commercial lending background and is regarded as an expert in business and finance ? specifically?Small Business Loans?and Working Capital.

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