I learned a big lesson when reaching out to outside lenders and investors for my future business. After meeting and talking with some banks, it felt like what I saw on Shark Tank. I truly feel like there are more challenges await.
To help the road of finding money less rough and clearer, lets prepare for what the lenders and investors expect from entrepreneur:
- They don’t lend or invest as a charity. They want to make money just like any other business.
- They want entrepreneur to succeed so they can get paid back.
- They want to make sure that if your business fails, there is guaranteed way to get paid back. So, no surprise why there are many mandatories and requires and conditions on process.
- They will look at your business plan; financial projection; personal guarantee the loan; collateral to secure the loan; compare with other businesses in the area regarding financial and business projections to see how you performed.
- They want to know how much you can invest in the business; they may require the entrepreneur to put in at least 30% of the project cost in equity; how much you want to borrow and why; is your cash flow makes sense and if you can afford a loan.
- They want all information related to your “5 C’s of Credit”:
Character: do you have proper experience, skills needed to run the business? Does your credit history show that you paid your debts?
Capacity: does your business have sufficient cash flow to pay the loan payment?
Capital: what is your business and personal’s net worth? How much your own money in hand?
Collateral: what assets do you have to secure the debt?
Conditions: what is the state of the economy? Are there other issues that may impact the success of your business?
You may ask yourself “why I have to borrow money? I don’t want to be in debt”. In another hand, your business surely needs capital to operate and if your business grows, you probably going to need more than one loan or a future investment. That why knowing your business and its potential success is so critical, same as finding answers for “what if” questions are not easy. But chasing your dream takes risks and remember that in this world “there is no free money”. The good news is there are government agencies and some non-profits organizations that support start-up businesses. Borrowing is an opportunity and just becomes a part of business as a regular customer/partner with your lenders/investors. Don’t get discourage for searching them.
PS: When getting a loan or an investment for your business, make sure to consider all the terms, read the fine print carefully. Interest rates on loans are important, but a low interest rate paired with high fees and a prepayment penalty may be more expensive than another loan with a slightly higher rate but lower fees. If you get a loan with an adjustable rate, make sure you will be able to pay the loan after the interest rate adjusts. Never sign any paperwork if it makes you uncomfortable, it could be a sign that the loan terms are not right for you.
Rogers, Stevenson (2014). Entrepreneurial Finance, Third Edition: Finance and Business Strategies for the Serious Entrepreneur. McGraw-Hill Education.