The Difficulties of Start-Up Financing

Regardless of the borrower's industry or business, the toughest loan for a lender to consider is for a start-up business. In virtually every circumstance, this period of the business is the most difficult for the borrower, and most certainly the riskiest for the lender.

With regard to the lender's concern during this time, the borrower must endeavor to overcome the natural skepticism that accompanies the lender's desire to help. The lender needs to be assured that the borrower can effectively organize available resources to generate profitable revenues quickly enough to survive and repay the loan as scheduled. For a start-up business loan, there is a greater emphasis placed on equity capital, because the lender wants the borrower to have enough cash reserve to meet unexpected expenses or unanticipated sluggishness in sales.

The lender will be somewhat adamant about requiring a substantial cash contribution from the borrower in the form of operating funds. The start-up phase of a business can always be counted on to produce numerous unforeseen expenses and, as far as the lender is concerned, there's no substitute for a supply of operating capital to ensure that the borrower can weather the initial storm.

Additionally, the borrower's financial projections will be scrutinized very carefully, because there will be no previous track record against which to compare the practicality of the numbers. The borrower should be prepared for every figure to be questioned thoroughly when the projections are presented to the lender.

Income and expense projections should be constructed realistically. The borrower should conduct extensive research when calculating these figures. It would also be wise to consult with non-competitors in similar markets to determine whether or not the projections are reasonable. Experienced business owners who will not be affected can quickly evaluate the forecasts and offer advice where needed.

The borrower should make an effort to demonstrate to the lender that the new business idea is feasible and can, in fact, succeed. In identifying the demand for the new product or service, the borrower must also show the experience or ability to meet that demand. The borrower must also demonstrate to the lender that the target audience has been identified and the most effective method of drawing that audience to the business will be utilized. The borrower must exhibit the knowledge that attracting paying customers, lots of them, is a fundamental key to the success of the business.

Since most start-up businesses don't have enough money or time to determine marketing through trial and error, the borrower should consult with advertising consultants who not only place advertising but who also develop ideas for communicating to the consumer group most likely to buy the borrower's products or services. If the borrower is a franchised company, much of this function will be included as part of the franchise package.

Start-up business owners should expect to have a more difficult time in securing financing. But placing emphasis on the items discussed in this article will assist in giving the lender confidence in two of the most important factors of the business: cash flow and revenue generation.

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