So you’ve got a great idea worked out for a business but one huge problem: no money.
So you’ve got a great idea worked out for a business but one huge problem: no money.
This is the problem for many business startups. Potential entrepreneurs can feel like they’re caught between a rock and a hard place — they can’t get a loan because they haven’t been in business long enough and they can’t get in business because they need a loan. The situation is a little more nuanced than that, but it certainly can feel like a black and white scenario. So what’s a potential entrepreneur to do?
Although banks will fund startups for applicants with strong financial backing and business projections, many entrepreneurs need to rely on other sources for startup capital. So where does that come from? This is where entrepreneurial creativity, risk tolerance and preparation come in.
I think the first question you as an entrepreneur have to ask yourself is if you have a business plan that makes sense, and not only to you, who may be doing some wishful thinking, but to others not as involved as you. Standing back and being as objective as possible can help you decide whether this is going to work. Do you have a product or service that is in demand, can you attract people who want to pay you for it, and can cash flow from those payments provide enough income for you and pay for any debt you need to take on? Assuming the answers to those questions are yeses, can you fund your business yourself?
Budding entrepreneurs who are convinced they have a good chance of success may turn to their own savings, home equity lines, personal loans, insurance policies, or tap into their 401ks, essentially underwriting themselves. It’s a risk, but that’s what being an entrepreneur is about, and if you feel OK about the level of that risk it’s a reasonable one.
Does your plan make sense to others; can you use your plan to attract investors? It is here that some would-be business owners turn to family or friends, people who already have an interest in seeing them succeed. (A word of caution, when turning to family or friends please make sure you and your investor are on the same page and document this in writing; don’t risk undermining a relationship.) Teaming up with a partner is another option, someone who has the money and is looking for a business venture and who may or may not have the same level of technical expertise as you. (Here again, talk it through, get it in writing; many are the rocks on which partnerships have floundered).
Alternately entrepreneurs may turn to venture capital firms or “angel investors” if they think they have a strong plan, to grants for certain types of businesses — although these will not be available for most businesses, or even to a relatively new phenomenon, crowdfunding. Last, but not least, you can keep your day job if your anticipated business is one which would allow you to do that. Many people have done just this, using their current jobs to provide living expenses while they start their new venture off hours. It’s not easy, but it may be possible. If you take this course have a make-or-break goal, so that you’ve targeted a decision point in the future when it makes sense to quit the day job or the new business so you can chase your dream without working yourself to death.
Back to banks. If you are turning to a financial institution for financing, in addition to a strong plan you’ll need a strong credit rating — if you don’t have one, learn how to improve it. You’ll need assets that can be attached to cover the loan and you may need another source of income other than your proposed business. And be prepared to have some skin in the game. No bank is going to give you 100 percent financing, so you’ll need to have some of your own money involved. Above all, have expertise in your field of business. Many people dream of leaving their past work lives behind and starting out in something totally new, but you’ve got to have some experience in doing that rather than asking a bank to bet that you’ll acquire that expertise along the way.
It’s not easy and it’s not for the faint hearted. Along the road to becoming a business owner also comes anxieties and risks, but so does the potential of making something of your own, becoming your own boss and hopefully making some money. You can do it. It’s something over 2,000 people do every year in Hawaii. Why not you?
Attend our next workshop: How to Streamline Your Work Process, Eliminate Waste, and Create More Wealth in Your Business, March 29, from 9-11 a.m. – register on line at www.hisbdc.org
Dennis Boyd is the director of West Hawaii Small Business Development Center.