FINANCING YOUR BUSINESS START-UP
Funding your start-up business may be the most difficult task you will encounter (although not necessarily the most important; finding a viable market is!). There is much to be said for "bootstrapping" your business (i.e., getting by with savings and money generated by the business.) In some cases, this may be the only way to get your business going. However, in many circumstances this is not feasible and under capitalization can be a very serious problem for start-ups.
Start-Up Financing Sources
Most people immediately think of commercial banks when they determine a need for business financing. Unfortunately, as a source of start-up funding, banks end up far down on the list of likely sources. Instead, most small businesses are financed through private funding and other sources. Some of these sources include:
(Note: Sources 3 & 4 are generally contingent upon your having a regular source of income, i.e., a job; thus, if you plan to travel this route, you need to secure this financing while you're still employed.)
Commercial Bank Financing
Most small business start-ups are inherently risky and commercial banks are traditionally risk averse. Bankers are neither investors in small businesses nor speculators, but they will lend money to a small business if its repayment is relatively assured. Commercial banks generally provide financing at comparatively low rates but in return expect a strict repayment schedule and detailed recordkeeping. Their main concern is whether or not you will be able to repay the loan in full and on time. The bank's lending officers look for specific criteria when evaulating your loan proposal. They will rate you on the following characteristics:
Meeting the preceding criteria can be very difficult for a start-up business. Often one or more criteria cannot be met. It may be especially difficult to convince a banker that your projections of sales and cash flow are realistic. This can be accomplished but only by exhibiting extensive knowledge of the business and the market. The bank will expect to see a formal business plan, complete with pro-forma financial statements, and will expect you to complete a personal financial statement.
When all the bank's criteria have been met, the banker will look for additional means to secure the loan. This can be done through a variety of methods:
Your first step in evaluating any business prospect should be a feasibility study to determine the potential of your particular product or service. The cash flow projection is a basic piece of any feasibility study. In it you estimate revenues and expenses of your business, generally on a monthly basis, for a year or two. This analysis is important in that it will tell you (and your banker or investor) what amount of funds you will need to invest in the business to keep it running until sales reach a point where they will support the business. This analysis will also illustrate the burden placed on a fledgling business by borrowed funds and will assist you in making the difficult financing decisions. Be aware that banks vary in their aggressiveness over time and between one another and that bankers themselves vary according to their own background and experience. Thus, you must be persistent and willing to shop around.