I’m currently leading an entrepreneurship training program sponsored by Catawba Valley Community College’s Small Business Center, and one of the issues that class participants always struggle with is how to get the funding to start their new business. The program brings in business professionals and resources from the community, and we’ve been fortunate to have Bill Parrish, regional director of the Small Business and Technology Development Center (SBTDC) in Hickory, and Darrell Johnson, vice president of business services at BB&T, speak to our class and answer questions about funding options for start-ups and small businesses. Some interesting points came up during their presentations:
Understand where your business is in its growth cycle to determine the appropriate funding source. New businesses assume that bank loans are their best options, but without a track record bank loans can be hard to get. There are other options such as angel investors, but new ventures must often rely on their personal funds or loans from friends and family to get off the ground.
Even though it may be difficult to get a bank loan, it will be easier if the new business owner takes the time to build a personal relationship with his or her banker. Banks are also interested in deposits, payroll services, and credit/debit card accounts that a new businesses needs. Your chances of ultimately getting a bank loan will increase if you’ve taken the time to build a relationship, familiarized the bank with your business, and demonstrated some success in hitting your numbers.
Cash flow is still king. Banks want to know they are going to be re-paid, so they will scrutinize your cash flow projections to make sure you understand your cash needs, particularly for the first year. Not having a good handle on your cash requirements and not being able to explain how much money you will need and how long you will need it will quickly end any chance you have of getting a loan.
Bankers are used to seeing sales and profits projections that are, shall we say, optimistic. Be realistic and conservative as you assemble your projections and do research on your industry and your competition. Explain the assumptions you are making in your business plan so the loan officer knows that you’ve done your homework.
Banks require collateral and personal guarantees. A great business idea is not enough; a bank needs the security of knowing how it will recoup its funds if the unexpected hits your business and you’re unable to repay your loan. Don’t be surprised or offended when the bank wants to review your tax returns and credit history.
The amount of money a business needs will also dictate the type of funding to pursue. Venture capital makes sense for some businesses, but it is more appropriate for larger transactions and will require giving up a significant piece of ownership in your business. Venture capitalists are most often interested in high-growth industries, so it’s a high-risk, high-return funding approach.
Funding a business is a real challenge, particularly in today’s lending environment. Both of our experts emphasize that new businesses should always minimize their start-up expenses to reduce their initial funding needs. Start the business in your home if possible, and get creative to avoid any unnecessary expenses.
Do you have a business question or topic that would make a good column? Send your ideas or questions to jeff.neuville@b-assistnc.com and share your business experience with others.
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