There are financing options outside of the banks.
Fear of failure prevents many people from putting their dreams of starting a business on hold, but there are two others, according to the Global Entrepreneurship Monitor 2013 report, a study by Babson College and several other universities. The business is not profitable or there are financing problems.
One way to ensure your business will be profitable before you start it is to run it on a limited basis, ideally while you’re still employed. You may discover some initial assumptions about your market were not correct, allowing you to adjust the business plan.
Preventing financing shortages starts with performing due diligence on what startup costs will actually be.
Network with owners of businesses similar to yours and get a sense of what your outlays will be the first and second year; ask how soon you revenue will flow, and how much you’ll need to cover business and personal overhead with cash from outside of the business. And ask established owners what could go wrong, such as a major repair to a piece of equipment.
If you’re planning to buy an established business, the franchisor or owner will provide extensive financial information during the due diligence process. If you’re not clear on the fine points, have an experienced small-business attorney or accountant review it.
Banks don’t like to loan money to startups, so you will likely need to try other avenues.
Most of initial financing comes from personal savings, but there are other resources, such as home equity or retirement accounts. Sometimes new business owners will live on a spouse’s income during the startup.
Having adequate funding is essential to your success. Plan ahead so you don’t run out of cash.
Mark Borkowski is president of Toronto-based Mercantile Mergers & Acquisitions Corp., which specializes in the sale of privately held companies.
This article appears in the October 2014 issue of PLANT.