You have your vision of business ownership. Whether it’s creating a new product or service, purchasing an existing business, or investing in a franchise opportunity, the dream is real.
You can see it.
For many entrepreneurs, the challenge comes after you have done the market research, assembled a team of quality business advisors, discussed your idea with family, friends, and mentors, and created a sound business plan. Financing your business can become a major challenge.
Whether seeking bank financing, investors, or using personal resources, securing the necessary capital to start the business can be one of the greatest challenges facing small business owners. The dream is real, but it looks to be just out of reach, financially speaking.
However, with proper planning and utilizing the right sources, such as Rollovers for Business Startups (known as ROBS) from Benetrends, entrepreneurs can secure the means to turn a vision to reality.
Here are eight common challenges entrepreneurs face when trying to secure funding.
1. Persuading Investors
Investors, whether they are angel investors, venture capitalists, or local business partners, need to be convinced that the company has a viable market, a compelling product or service, and strong management that is up to the task. In some cases, this requires entrepreneurs to create a comprehensive business plan that evaluates markets and competitors. In others, it means providing a powerful case for why investing in you and your team is worth the financial risk.
2. Knowing Financial Needs
You can anticipate all you want, but it is difficult to truly know everything for which you will need finances. You can start with the capital expenses, including buildings, equipment, machinery, and land. Then there are the up-front operating expenses. These include inventory and product, furnishings and fixtures, office supplies, signage, advertising, and permits. Finally, business owners need to factor in ongoing expenses such as rent or lease costs, utilities, salaries and benefits, and franchise fees.
While it is important to collect, itemize, and realistically project those needs, there is also a fair amount of uncertainty. You may find, for example, that you need to spend more on marketing and advertising than you expected when the doors open. Labor and training projections may not meet the needs. You may need to bring in consultants or advisors to help with certain aspects of the business.
3. Not Understanding All the Financing Options
There are multiple options available for small business owners. Here are a few of those options, and the advantages and disadvantages of each.
- Term Loan. These monies are paid back over a specified period of time, usually 3-10 years for small businesses. Bank loan applications can take several months, as lenders need to do extensive due diligence.
- Business Line of Credit. These revolving loans give business owners access to a fixed dollar amount that can be used for day-to-day operational needs. It provides flexibility for business owners but can be difficult to obtain.
- Federal Small Business Administration (SBA) Loan. The U.S. SBA partners with multiple lenders to provide various loans, including small-amount microloans that are partially guaranteed by the federal government.
- Merchant Cash Advance. This is not a loan but an advance that is usually based on the history of credit card business sales. This product allows for funds to be deposited into an account that provides gap funding. The provider will hold a percentage of the credit card sales until the advance and any fees are fully paid off. These advances are usually for a short term and have a higher interest rate than traditional loans.
- Equipment Loans. These loans can sometimes be easier to obtain than other loans, as the equipment being purchased is usually held as collateral. For those businesses that cannot qualify for an equipment loan, leasing equipment is a good alternative.
4. Understanding Personal Creditworthiness
While an individual’s personal credit profile is not always the best indicator of how likely a business owner is to pay back debt, it will likely play some factor in financing decisions. It is important to understand your personal credit profile and to fix any errors before pursuing external financing.
5. Lacking Sound Processes
New businesses, especially those where the owner is the sole employee, often operate at first without the structure that is necessary as a business grows. That means that processes and procedures may not be documented. This lack of documentation can hurt a business seeking financing when there is a request for materials or systems that detail consistency and clear methodology.
6. Declining Availability of Private Funding
A recent Federal Reserve study showed that the credit availability for small businesses is still tight. The survey shows a number of problematic findings, including:
- Only 45 percent of small companies ($1 million in revenue or less) were successful at securing funding from large banks. The success rate was only slightly better at small banks (60 percent) and online lenders (59 percent).
- Only 53 percent of businesses were approved for the full amount of loans or lines of credit requested. The rate was worse among smaller businesses; 67 percent did not receive the desired amount.
- Seventy-six percent of businesses used personal finances to close the gap.
7. Missing Collateral
Traditional lenders will usually want collateral to lessen the risk of a business loan, especially for a new business. Many individuals do not have adequate collateral to qualify for loans from bank lenders.
8. Considering All Financing Options
There are many different sources of small business financing. Here is a look at the most common ones.
- Traditional Lenders. These include large and small banks and credit unions. These lenders offer a range of loan and line of credit products.
- Online Lenders. This is a growingsector of lending that often has more flexible criteria for loan approval.
- Venture Capital. These companies assess various business ideas and provide start-up and ongoing capital in exchange for an ownership stake in the company. Often, venture capital firms expect high company valuations and involvement in the operations and strategic direction of the companies in which they invest.
- Crowdfunding. Using online tools, crowdfunding platforms allow small businesses to tell their story and seek donations from all over the world to bring a business idea to fruition. Some sites require you to set a financial goal for the crowdfunding project and the funds are not released until the goal is met. In other cases, the business owner can offer online crowdfunding investors with equity in the business.
- Friends and Family. Often, a small business owner has to rely on friends and family to support a new enterprise. While this approach may not be the most desired, it often is the only way to get a business up and running. Be careful of such arrangements, however, as expectations and relationships can be complicated by going into business with loved ones.
A Different Approach
At Benetrends, we use a different approach to helping entrepreneurs finance their business dreams. Our company was the first to establish an innovative approach to business financing.
Benetrends helps business owners secure financing for their new business and invest in themselves by using their 401(k) retirement accounts or IRA. The Benetrends approach is simple and gets money into your hands quickly. The advantages to using retirement accounts are considerable, including:
- Business owners accrue no debt and have no loan payments.
- There are no penalties to the retirement funds for early withdrawal.
- Funding can be secured in as little as 10 business days, not months like with other lending strategies.
- Benetrends’ experience takes away the stress and worry of securing funding.
- The process of using Benetrends for securing small business financing is simple. There are four core steps:
- Establish a C Corporation. A C corporation is a legal business entity that is established through a legal filing. Under a C corporation structure, federal taxes are paid by the corporation, not the owners. It is a common business structure for small businesses. At Benetrends, we handle all of the paperwork required to register as a C corporation.
- Create a New Retirement Plan. Your new business will need to establish a qualified retirement plan and open the appropriate corporate and retirement plan bank accounts. As the business owner, you will need to create a retirement plan at the new company that meets your needs.
- Roll Over Existing Retirement Funds. Benetrends will help you with the process of rolling over your existing retirement plan funds into the new company’s retirement plan account.
- Secure the Funding You Need. The newly established retirement plan at the C Corporation can purchase stock in your company. That money becomes capital you can spend on any of your business needs.
Benetrends has been in business since 1983, providing small business owners with powerful solutions. Over the years, we have helped thousands of entrepreneurs. We develop long-term relationships with our clients and are invested in their financial success. To learn more about Benetrends, contact us today!