QUESTION: I want to start my own business. I have heard that it is quite difficult to obtain bank financing for a start-up operation. What advice can you offer?
ANSWER: For starters, certain types of businesses will encounter resistance from lenders because of their failure rate. Restaurants and specialty stores, such as bookstores, gift shops, hardware stores, and office supply stores, that compete with online stores and superstores, are good examples.
Unless your product or service fills an underserved niche, you’ll be fighting an uphill battle. Niche marketing is an advertising strategy that targets a section or subset of an entire market. Instead of marketing to one and all, you target a particular group of potential customers who are most likely to benefit from your product or service.
Banks think that start-ups are risky, especially if the entrepreneur does not have a proven track record. So unless he has worked and has experience in the type of business he is considering, his chances of obtaining bank financing are limited.
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An entrepreneur may have a better chance of getting a bank loan if he buys an existing business with a track record of strong performance. In this case, he has a loyal customer base, capable employees, and a good location, with furniture, fixtures, supplies, and equipment in place.
Another path of least resistance is to consider purchasing a franchise. Here you have a proven business model to work with and you are guided, to a degree, by the franchise company.
There are many franchise opportunities, but before you invest, be sure to do your research thoroughly by contacting other franchisees. Also, read the franchise agreement carefully and have your attorney review it before you sign it.
A recent Wall Street Journal article noted that such lenders are among the most common types of Small Business Administration-backed business loans because they follow a proven business model.
It should be noted that the SBA does not lend money. Rather, it insures banks against losses from borrower default and its fee is added to the interest rate charged by the lender.
Without a doubt, if you don’t have adequate working capital, your chances of success are dubious. In addition to start-up and/or acquisition expenses, you’ll need six to nine months of working capital to get you through the season and other events that affect sales.
My best advice is to start now to develop a written business plan that includes 12- to 24-month projections of income and expenses, based on your research. Many business plan outlines are available for purchase online. SCORE also offers a free business plan template available at https://richmond.score.org/resource/business-planning-financial-statements-template-gallery. This way you can determine your chances of success before you spend the first penny.
Gray Poehler volunteers with the Richmond Chapter of SCORE, Counselors to America’s Small Business. To ask a question or request free, confidential business advice, visit Richmond.score.org/mentors. Learn more about SCORE workshops on the website or by calling (804) 350-3569.
