Category: entrepreneurship

Behind the Scenes of Small Business Financing: Setting Straight Loan Myths

Many first-time business owners come to us for assistance in obtaining financing for their ventures. Often, they have no idea what to expect when securing a business loan. However, several misconceptions about financing prevail. Let’s debunk some of these myths:

  1. Government Grants for Startups: There’s a widespread belief that government grants are readily available to kickstart any business venture. In reality, while there are opportunities for government contracts, grants for starting a business are rare and highly competitive. Be cautious of scams promising easy access to government funds without strings attached.
  2. Idea vs. Execution: My clients often tell me, “I have a great idea,” but they have no plans to execute it. Having a brilliant business idea is just the beginning. Potential lenders, such as banks, look beyond the idea itself. They require a solid business plan and demonstrate that you have a customer base that will purchase your service or product. Family and friends might financially support your idea, but a bank needs concrete evidence of feasibility.
  3. Importance of Personal Credit: Your personal credit history matters significantly when applying for a business loan. Lenders assess your creditworthiness to gauge your financial responsibility. They want to know if you prudently manage your own money before they lend you the bank’s money. Aim for a credit score of 650 or higher before applying. Monitor and improve your credit score well in advance of seeking financing.
  4. Expecting 100% Financing: Contrary to popular belief, most lenders require business owners to invest their own funds into the business. This is known as having “skin in the game.” Typically, lenders expect startups to contribute 10-25% of the project costs and 5-15% in a business that has longevity. Start saving early to demonstrate your commitment to your business venture.
  5. Pre-Qualification by Lenders: Commercial lenders don’t pre-qualify borrowers in the same way as mortgages. You need a clear project plan and loan amount in mind before approaching a lender. Many borrowers think of the minimum amount they need for the primary project, then consider additional tasks a bonus if they get more. Calculate potential loan payments and ensure they fit comfortably within your financial projections.
  6. Differences Among Banks: Not all banks are alike regarding business loans. Each bank has specific lending criteria and industry preferences. Some may require businesses to have a proven track record, while others may specialize in specific sectors or have unique risk tolerances. Recently, the banker declined my client for a loan because the banker considered the loan below their “minimum loan value.” Another time, a banker explained that their loan portfolio was too heavy for the industry my client wanted to enter. The bank wanted to diversify in lending to other sectors. Research and choose a bank aligned with your business needs and goals before you apply.
  7. The Necessity of a Business Plan: A well-crafted business plan is essential, especially for startups. It outlines your business goals, market analysis, financial projections, and operational strategy. Lenders rely on this document to evaluate your business’s viability and ability to repay the loan. Established companies will have their tax returns to demonstrate the business’s success, but you might still be required to provide a brief written history of your business and the purpose of the loan.

In conclusion, securing financing for your small business involves thorough preparation and understanding. It’s more complex than many initially assume, requiring diligence and a strategic approach. Educate yourself on the realities of business loans to increase your chances of success.

From Self-Employment to Business Owner: Growing Your Small Business

Technically, self-employed individuals are considered small business owners. However, the term “self-employed” typically refers to individuals who independently earn a living based on their skills or efforts alone, without relying on employees or contractors

Many types of businesses naturally lend themselves to self-employment:

  • Skilled trades like plumbing, electrical work, and HVAC
  • Services such as landscaping, painting, and power washing
  • Professions like accounting, bookkeeping, and marketing consulting
  • Creative fields including artists, photography, interior design, and graphic design

Transitioning from Solo Work to Growing Your Business

Many of my clients start their businesses to pursue their passions or meet community needs. Those who excel in their work and effectively market their services often face the challenge of managing increasing demand. For those who prefer not to hire and manage employees, they may choose to limit their workload or extend project timelines.

For those ready to expand, strategic decisions become crucial:

  1. Outsourcing vs. Hiring: Consider outsourcing tasks rather than committing to full-time employees. Divide tasks into primary (core business activities) and secondary (support functions) categories. For instance, an accountant might outsource bookkeeping while keeping tax preparation in-house. A home remodeler might hire external specialists for HVAC or finish carpentry work.
  2. Seasonal Work Considerations: If your business experiences seasonal fluctuations, hiring temporary employees can be cost-effective. For example, an accountant might hire temporary staff for tax season support.
  3. Part-time vs. Full-time Employees: Evaluate whether part-time help can meet your needs while controlling costs before committing to full-time hires.
  4. Cost Considerations: Beyond wages, factor in employer contributions to Medicaid and social security, benefits, payroll software, and insurance when budgeting for new hires.

Preparing for Business Growth

Transitioning from sole proprietorship to managing employees can be both challenging and rewarding. Consider investing in training on hiring practices and employee management to ensure a smooth transition. Establish clear employee policies as your team expands, shifting your focus from hands-on work to overseeing operations.

Conclusion

Growing your business requires careful consideration of financial implications and time commitments. Evaluate your goals and preferences to make informed decisions about expanding your team. Ultimately, building a business that can sustain itself beyond your direct involvement can provide long-term security and opportunities for succession or sale.