With more and more people going into business on their own the pot of money available to start-ups is getting increasingly hard to access. And with the odds of a start-up business failing within five years somewhere in the region of 75% it is clear that most investors and financial institutions are going to be extremely selective when it comes to handing out seed money to start-up businesses.
The main reason that people get turned down when they’re applying for loans is that they make a number of mistakes in the application process. This article will outline the five most common mistakes and how to avoid them.
1. Expecting the Lender to Take all the Risk. This is the single most common mistake in trying to raise funds. Why should someone take a risk on you if you won’t take on any risk yourself? In addition, if you’re not able to raise any funds at all to start this venture, how much faith in you can you really expect? Ideally, start-up investors like to see the borrower putting in between 30% and 50% of their own money.
2. Not Writing A Professional Business Plan. Many loan applicants will look at the business plan as a formality and just another form to be filled in the application process. This is a mistake. The business plan should be written as a document of intent for your business and a plan not just for the lender, but for you. It should be detailed and outline not just the best-case scenario, but also the worst, it should outline what could go wrong and how you intend to avoid that. It should show that you know your market and your competitors and where your business will be in years one, two and three in terms of profitability.
3. Not including Working Capital in the Projections. As part of that business plan and your application you will no doubt outline the property to be leased, the assets to be bought, the costs of improving your lease property and other expenditures to get you started. What many businesses forget is to also include a realistic figure for cash flow for the first few months while you are getting the business on its feet. Again, this is part of the business plan and the ability to admit that the business might not be cash positive for a little while.
4. Not Conveying your Expertise and Experience. Lenders need to know they can put their faith in you, the person running the business. You might have a good idea but have you got the skills to see it through? If you’ve got the skills, make sure you sell yourself. Include a convincing resume and examples of previous work or experience that will be relevant to this business. Also do the same for any other members of your team you might be bringing on board.
5. Don’t Fall to Pieces in the Presentation. Meeting the lender in person will be your only chance to sell the deal. You can either inspire confidence or make them think you’re not someone they want to invest in. First off, don’t forget the basics, like a suit, smart shoes, and a well-groomed appearance. Next, be confident and positive, but don’t be arrogant or over-confident. Try to get across to the lender a clear and articulate summary of what you hope to do with the business. Don’t try and wing it and see how it goes on the day. Practice what you’re going to say and how you’re going to say it.