Question: “How do I get more money to fund my business? I tried applying for a business loan and was turned down. Thanks much–I appreciate your input!”
—Kathy Brooks, Ooltewah, Tenn.
Ali’s Answer: Hi Kathy. Before you go out and get a business loan, first ask yourself what you really need the loan for. Many people who start businesses mistakenly think that getting a loan is just what they are supposed to do. If you are opening a business that requires you leasing space, purchasing inventory, renting equipment, or the like, it makes sense. But honestly, most of us homegrown entrepreneurs just “bootstrap” it and get things going ourselves.
I was not only pretty much broke when I started my first business, but I was also in a TON of debt. After reviewing my options though, it still made sense to put my initial expenses on a credit card I did have some room on. It got me what I needed to start making money–business cards, a basic website, a printer/fax, and one good suit and a pair of shoes. I used an old computer that my younger brother gave me–it was a clunker, but got the job done for the time being. From there, I had to hustle. That’s bootstrapping.
But if you are convinced you truly need a loan, then it’s helpful to look at what “real” companies use for funding…
A recent study of Inc. 500 companies showed that of those who did seek outside capital, 80% of them used a bank line of credit, 52% of them got a business loan, 45% used their own personal assets, 26% got money or credit from friends and family, 18% secured venture capital, 13% used strategic partners or customers, and 3% received grants. Now remember, these are companies that are in the millions of dollars, and most of these founders knew they were going to grow a large company. So, they were prepared to play big.
For the small business owner who is just getting off the ground to get going right away, the important thing to remember is to just get what you need for now, your Phase 1.
Based on working with hundreds of entrepreneurs personally over the past several years, and witnessing many of them figure out how to handle a cash crunch while still growing a business, here are your basic choices:
1. Your own extra cash (I know, “extra”, ha ha…)
2. Your own credit resources (credit cards or credit lines)
3. Friends and family (make sure to have a written agreement that is clear)
4. Strategic partners or customers (perhaps you know of another complementary business that you could work together to help grow, or similarly a star client or customer who could help you as well)
5. A business loan, typically from a bank
If you are going to go out and try to get a loan, you’ll need to show a solid business plan that lays out how you’ll make money with your venture. Remember, when a bank gives you a loan, it’s essentially betting on your business; they are wagering that you will succeed. So you have to show that your plan will work, and they have to understand it. Most banks still seem stuck in the industrial age, so they will also be looking for assets to cut their losses if needed. All this amounts to it being typically harder for those of us who just want to launch a solo-preneur or micro-business where we are offering our services, or information-based businesses where we are selling information or memberships online. They just don’t get it. But all that doesn’t say you shouldn’t go for it.
For tips on securing a small business loan, go to www.sba.gov and check out their resources and recommendations.
Last but not least… don’t forget about getting creative. For example, I was working with a husband and wife couple a few years ago who wanted to take their business to the next level. While they had run out of credit, they did have a few assets they could sell. They decided to sell their small boat, which was mostly just sitting idle on a trailer in the backyard anyway. They figured they could get several thousand dollars for it, and put that money to work for them, while they could go rent a boat the few times each summer they really wanted to be on the water.
Best of luck to you. And for everyone else, please share below if you did get funding for your business, how you got it, and if you have any advice to share. We would love to learn from your experience!
Love and success,
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