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It is very clear now that banks are not and probably will not be lending to startup businesses anytime soon.
If banks do lend to small businesses, they want these companies to have some revenue and more importantly some profits ? both of which most startup businesses don?t have ? that is why they are still startup businesses.
New businesses have always had trouble getting outside debt financing ? especially from banks of any size. So, most new business owners have to turn to alternative (usually personal) resources to get their business off the ground ? from home equity loans to utilizing savings and retirement accounts.
But, home equity loans are hard to get these days as the majority of home values are lower than the amount owed on the loan ? thus, no equity. And, with Social Security and Medicare not a future options for those under 55 years of age, it is hard to tap into those retirement and savings resources to take a risk on your new, unproven business (although if you believe in your business and your ability to pull it off, it might not be that big of a risk after all).
It?s an old adage: If you won?t risk your personal assets and your own financial future to start your business then neither will banks or other private lenders.
So Then, What Is A Startup Business To Do?
For a startup business, you would have to find ways to bootstrap no matter what the economy (good or bad). So, stick to the tried and true ways that businesses have used for centuries to get their doors open and on the path to success:
Over half of all businesses (past and present) have or are using credit cards to fund their business. These could be personal credit cards, which most are, or business credit cards. Interest rates are high but if you have no other options and your business model is untested, these cards can get you the capital you need. Just use them as sparingly as you possibly can and only purchase items that will return some type of revenue to the business ? revenue you can use to payoff these cards monthly.
Credit cards offer easy access to capital (particularly working capital), flexible terms of repayment and allows your business to defer payment(s) for weeks and even months. That is why they have been used and are still being used to help new businesses start and grow.
Friends and family. If you have friends and family members that have some disposable income or savings ? make the pitch to them. If you can?t get THEM to believe in you and your business it is highly unlikely that you will be able to get customers to believe in you and your products or services.
Just think about the thousands of businesses (Ross Perot, Mark Cuban to name a few) that started their businesses with small loans from people they knew. Even Facebook, in the beginning, was financed particularly from small loans from the co-founder and other friends.
Start small and keep cost down. It is not that most businesses need a lot of money to get started but that they have to work to keep their costs and expenses low. Lower costs means less outside money needed.
Can you start your business online using the plethora of free resources to build a website, acquire an ecommerce solution and target market your business to potential customers? Can you start and run your company out of your home to keep your rent, utilities and other overhead costs down?
Sometimes it?s not about how much in a loan you can get, but how much you really need to spend to get your business moving.
Get customers to pre-pay. Let?s say that you sell a product for $1,000 but your direct costs to create that product is only $500 (50% margins). Then, get that $500 (or as much as you can) upfront. Thus, your costs are covered, you complete the project and earn the profits ? then do it all over again.
Look at all those products that are promoted on TV or online. You pay 100% at time of order and then wait 4 to 6 weeks for the product to be delivered. This gives those companies 100% of their costs and profits upfront and allows them 4 to 6 weeks to complete and ship your order. If they can do it, then so can you ? regardless if you are online or sell via TV ? just find a way to get customers to per-pay.
Beg. This is not about getting down and your knees and groveling but about finding ways to defer, delay or minimize expenses.
If you need space, you can negotiate with landlords who would rather have the potential of earning rents in the future then to let space just sit there empty. Tell them you will give them a portion of your income (profits) until you reach a certain level of sales and then will transition into standard, set monthly payments.
Or, if you need products from vendors to re-sell or to create new products or services, negotiate with them. Some will give you trade terms allowing you the time you need to sell to your customers or some will provide vendor loans ? loans to purchase their products. This gets you what you need and let?s them realize sales and revenue.
Running any business is about finding ways to generate revenue from a limited set of resources. It takes dedication, hard work and creativity ? regardless if you have a lot of money or not. So, why not start in the beginning. Get creative and spread the resources you do have as far as you can while finding other ways to finance your new company.
If you can?t figure this out now (how to manage the set of resources you have or can get your hands on), then you won?t have the skills to do so later when competition or imitators crop up to challenge your business.
Lastly, do know that this is not forever. Once your business begins to generate revenue (cash flow) many new financing options will open before you ? be them alternative financing avenues like purchase order financing, business cash advances, bank statement loans or invoice factoring to SBA and standard bank loans. As you work hard and grow your business, the path ahead always becomes easier.
If banks are unwilling to help you realize your small business dreams, then it is up to you to find the money you need to start, grow and succeed. You came up with the business idea on your own. You developed your business plan and business model on your own. Now, is your time to get creative and find your path to financing on your own by turning these 5 startup financing tips and any others you can think of to your advantage.
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