So You Want To Start A Business: Financing Your Business
Financing Your Business
In the last two blogs, I discussed the importance of writing a business plan and touched on other factors that should be considered before embarking on a business venture. Now, I want to expand on different avenues you can use to fund your business. This is a pretty vast topic and can differ heavily depending on what kind of business you plan on opening. However, I will be speaking mostly to my experience with opening a smaller brick and mortar business.
Getting Started
When you start looking for financing, make sure you have certain documentation in order before going to meetings. A few example documents that I was always asked for when talking with loan officers included the following:?
Once you’ve gathered the relevant information regarding your personal finances, you can set out to find a financial institution that caters to start-ups. Words of caution here, most banks and financial institutions do not cater to start up companies. Finding financing was easily the most frustrating part of starting the business. You want to work with an institution that will align to your type of business but that is also very hard to find in most cases. In my case, I ended up going with a bank that specialized in funding medical professionals to start their own clinics / practices.?
There are some things that every business owner should be wary of when starting their financial journey. A few of these things are that there are a lot of loan shark companies out there disguised as legitimate funding avenues and personal loans normally cannot be used for business. Finding funding can be very easy but finding funding that isn’t super sketchy can be quite difficult. It’s also very odd that you could technically take out a personal loan and gamble it away in Vegas but can’t use it on a business because of the associated liability.
Financial Institutions That Did Not Work For Us
I want to first say that my experience in finding funding will not be the same as everyone else’s and some people may find the following institutions to be very helpful in funding their venture. They just were not useful for my business and I was shocked by that because when I first set out to find funding, I thought these institutions would be the easiest to go to.?
The first institution that we went through was a bank that specializes in helping small businesses get funding through the Small Business Administration. I decided to start there because I assumed this was what the SBA was meant to do. I do see how the SBA could be a useful tool to a different business owner, they were a major disappointment for myself. It was a fairly extensive process to apply for the loan even with the help that we were getting from the bank to submit documentation and track the status. All in all, it took approximately three days to get all of the information for the loan submission which included pay stubs, breakdown of funds, bank statements, tax returns and a bunch of other things. Once the submission was put through, I was told that it would take around 2 - 3 weeks to hear back. This is fairly normal as banks need time to process your application. The bank reached back out to me a few times during that 3 week period requesting some additional information (again, pretty normal) and then regretfully informed me that the SBA would not be moving forward with funding our venture. The reasoning was that our business model was not proven.?
This was dumbfounding to me because in addition to the SBA saying that our business model was not a proven model, they also said if we wanted funding with the model that we had submitted, we would have to submit 2 years worth of documentation stating that we were a viable business. The issue with this is no start-up is going to have two years worth of financial documents, hence why they are asking for money to start their business. I don’t want to downplay the SBA because I understand they can be a resource for some business owners but to the majority of startups, they will be basically useless.?
Situations that the SBA would be a helpful resource for your business is if you are opening a franchise or are looking to expand your small business. The SBA funds a lot of franchises because they are considered to be proven and viable business models as opposed to startups. They are also a resource for businesses looking to expand and still fit into the mold of what they consider to be a small business. If you are looking to expand, go onto their website to see if you qualify as a small business because there are quite a few stipulations surrounding how much revenue your business has and employee size.?
The next issue we had with 90% of financial institutions was that most of them did not support startups unless they were a tech business. Again, I understand how that is a much lower risk for the bank but it is basically killing small businesses in America. Tech businesses are seen as better investments because they very rarely have high expenses because they do not require a physical location, equipment (beyond software / computer hardware), and are normally started by very small teams of people. When banks look at the risk a normal small business takes on it is massive. Most properties require a 36 month lease commitment with some requiring up to 60 months. It is hard to break lease agreements and if you are leasing a space, you also have to furnish and staff that location. Most businesses require more than one person to be working and if it is just you, you will start accumulating employee expenses which can get expensive very quickly. There’s also a lot of other miscellaneous expenses that come from having a physical location and staff versus an online presence. For these reasons, a lot of banks tend to steer clear of lending to brick and mortar startups especially if it is your first business.?
The last avenue of funding that just did not work for us was angel investors. This is something that a lot of books talk about as a reliable way to fund your business but when I started heavily looking into it, I found that it was just not a good fit for me. The process is pretty long and is more of a college application than a loan application. The companies that exist work to put you in contact with an investor that would have similar interests as your business and a personality that would mesh with yours. The concept is great as it puts you in contact with like-minded people that are probably very interested in whatever business you are trying to open. However, like I stated before, the process can be quite lengthy (we needed funding rather quickly), and a lot of the angel investors are starting to solely invest in tech companies / online only companies. It is extremely hard to find an angel investor for a brick and mortar startup and the reasoning is it’s not a smart investment on their part. Most businesses (~80%) are going to fail within their first year, and the vast majority will not see past five years. That’s a horrible statistic for an angel investor, so they tend to not support brick and mortar startups.?
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How We Funded Our Business
So, if we didn’t use a lot of traditional methods in funding our business, how did we do it? Good question. After being rejected from about 20 different financial institutions, I stumbled upon Hippo Lending out of Virginia. They are a bank that specializes in funding medical professionals in starting their own clinics / practices. I reached out and told them that I held a degree and if I qualified for their program. They told me I did and we started the process of the loan application. My advisor through Hippo was amazing and helped me through the entire process, which was extremely tedious. They wanted to see a lot more information than previous institutions so the application phase did take a few more days than we were used to. However, we were approved fairly quickly and were able to discuss rates after only about a week - ten days.?
The biggest downfall with the type of loan we were getting was it had a high interest rate and it had to be personally guaranteed as the business did not have credit but me and my husband did. This is a fairly common situation that happens with new business owners but it still didn’t make it any easier that we would be personally guaranteeing a loan in our names for the business and that the interest rate was significantly higher than any loan we had signed on before. There were a few other stipulations that we negotiated like the time frame that we could pay off the loan. Pay attention to clauses like these because they’re normally kind of hidden in the paperwork but could end up costing you a lot more money in the long run. Originally, our loan was set to not be able to be paid off for several years but we were able to get it down to 12 months.?
Other Avenues You Can Use To Fund Your Business
This section will go over some other ways that you can get cash for your business. I don’t think that these will apply to everyone because of how vastly different every person’s personal situation is but if one of these can apply to you, I would say to take full advantage of it as it will definitely help you in the long run.?
If you know people or are in a position to look for outside investors for your business, that is an excellent opportunity to put other people’s money to work for you. Please be aware, however, that using an outside investor for your business comes with its own risks and repercussions. The investor, depending on how much they put in, will have some say in the business normally and if your views don’t align with theirs they could threaten to pull money. That would be an extreme situation but it is not unheard of. If you are going that route, definitely make sure that you speak with a lawyer and have documents prepared ahead of time to protect yourself and the investor.?
Family members are also a great way to gather finances for your business if they are in a position to loan you money. Again, use this cautiously as you do not want your business to come between you and your family member. When money starts to get involved, tensions can also seem to rise. The best way to alleviate this is to be very transparent about how you are going to be spending the money, you should be treating this type of investment the exact same as a bank loan. Even if they are family, have a lawyer draw up some documents to schedule out a repayment plan, what the family member gets out of the deal, and have it outline the allocation of funds.?
Lastly, there are a lot of grants available from different organizations and government agencies for people to open businesses. These grants are much more likely than not to be for minorities opening businesses or for people that are opening businesses that are in very high demand or for non-profit organizations. However, like I said before, if you have the ability to get one of these grants, I would say to apply to it.?
Closing Remarks
The last thing I wanted to touch on in this blog is some things you should really consider when asking for funding. First, a timeline to open is not the same thing as a timeline to profitability. Almost every business that’s just starting out is going to operate at a loss for the first few months at a minimum. Even if you are opening a franchised location, you cannot expect that you will just be able to have a solid clientele base the minute you open your doors. It does take time to build good relationships and in those first few months this will result in operating at a loss. All of this goes to say that you should ask for more of a loan to push you through those first few months. Any revenue you earn can help offset costs but it will most likely not be enough to completely break even.?
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