STARTUP – Is this the right move for you?
Financial considerations to make before you startup.
When you’ve determined to be your own boss – whether you’re startup includes an innovative idea for a product or service, or there’s a franchise opportunity you want to get in on – it’s easy to want to jump the gun and focus on getting started. However, before starting or acquiring a business you need to ask yourself some tough questions.
- Are you willing to put in the time, effort and perseverance needed?
- Are you ready to wear multiple hats, work long hours, take risks and potentially sacrifice relationships?
- Are you a strong negotiator and decision maker, and in a position to make success happen?
- Do you have a solid business plan?
- Do you have the skills and experience required, and a solid team of advisors to guide you?
- Are you in a place to understand the marketability of your product or service, or know what franchise options are right for you?
Finally, and most importantly, will you have appropriate financial backing?
Whether you’re using your own savings or receiving funding from family, friends, investors or banks – it can be one of the most stressful parts of starting a business.
I get it. As president of 21st Century Bank, I sit across the table from business owners daily – people who are just like you and anxious to get started on their life’s work. While it’s incredibly tempting to start contacting banks immediately after you cement your decision to become an entrepreneur, it’s worth it if you can temper your excitement and thoroughly prepare before you begin considering funding.
There is a lot that goes into business financing, and even though a bank may give you a loan, it does not mean it’s the best one for your business. That is why I am writing this article – sharing my 15 years of banking experience in hopes it will help you make the best decision possible when it comes to funding your startup.
Understand the differences between big banks and community banks.
This is not us versus them. Larger financial institutions advertise their small business programs, and in some circumstances, they provide a solution that fits your needs. Community banks have had a long-standing tradition and reputation of being a leader in supporting small businesses in the communities they serve, and most have a broader base of expertise in small business lending. Most community commercial lenders have experience working with small businesses, and are more likely to focus on solutions that fit your business rather than selecting a financial package that’s not right for you.
As you begin your business venture, I highly recommend having the support of an advisory team – a financial consultant, lawyer, accountant and a commercial bank lender. Having a commercial lender on your side ensures you understand what loan products are available to fit your current startup needs. He or she can also provide insight on the long-term utilization of funding options needed to maintain and sustain your business as you grow.
Know the difference between SBA 7(a), SBA 504 Loans and Conventional Loans.
Think of these different types of loans in the same way you think of consumer products – let’s say you’re shopping for golf clubs. As an amateur golfer, I want to talk with an expert that understands the game, knows the equipment and asks the right questions of me. They need to know what my goals are, in to order to recommend the right club to help improve my game.
The same goes for bank loans. You want a product that makes sense for you, and the right bank advises you on all your options, not just the one that they prefer.
Three products/programs for consideration are:
- SBA Loans which are backed by banks and the United States Small Business Administration (SBA), which provides options for individuals with limited credit history, or businesses that do not qualify for a conventional loan. It’s worth noting that 21st Century Bank is a SBA Preferred Lender (PLP). PLP, which stands for Preferred Lender Program, is an SBA designation that delegates the authority to process, close, service and liquidate most SBA guaranteed loans without prior SBA review.
The two primary programs are:
o SBA 7(a) Loans, which are popular for startups. They give business owners access to working capital for furniture, fixtures, leasehold improvements and more.
o SBA 504 Loans are more of an economic development incentive to promote business growth and job creation. They are often used for businesses seeking to purchase and/or improve commercial real estate and existing buildings or build a new building.
To explore more detail about SBA Loans, you will want to review an article I wrote here.
- Conventional Loans are backed by banks. They may carry lower interest rates and can come with a faster closing process. However, most businesses that seek Conventional Loans already have a strong personal financial portfolio or an established cash flow stream.
If you’re offering an innovative product or concept, consider crowdfunding or identify angel investors.
Outside of bank loans, there are other ways to obtain capital. If your idea is still in the concept phase or the product you want to market does not yet have a steady cash flow stream, you may want to consider Crowdfunding platforms like Kickstarter, Patreon or GoFundMe, all of which are well known. These platforms help increase the visibility of your business and help you secure funding – without requiring, you provide donors with equity in your company. Keep in mind; fees for these platforms can be expensive.
Crowdfunding also helps you hone and practice your business concept sales pitch, which can help you attract Angel Investors. These individuals are not providing you with a loan. They put money down for equity in your business. They take the risk in hopes of getting a return when you see success. Angel Investors are also beneficial as many will share advice or provide hands-on involvement in your business.
When you are ready – thoughtfully prepare for your first meeting with a lender.
When initially meeting with a lender, a first impression goes a long way. You will stand out if you are prepared and if you ask the right questions. Whether you are meeting with us here at 21st Century Bank, or at another financial institution, I recommend you prepare the following:
- In-depth business plan with information on how much money you need, how you’ll use it and how you’ll pay it back
- Documentation of collateral you can use to secure the loan and cash you will use to supplement it
- A list of business partners and their related financial information
- A list of questions you want to ask the lender, including their experience, and their institution’s experience, with the type of loan you are seeking
There’s a lot more that goes into this process that I’ll save that for a future article. In the meantime, make sure you do your homework. Here are tips I love that will help you win over your lender.
Your Next Steps
Our lending team at 21st Century Bank serve as business advisors, giving advice with, or without, benefiting from a sale. If our loans are not right for you, I will tell you outright, and my colleagues will do the same, rather than trying to fit you into a product that does not make sense for your business. Our business solutions are tailored for you. Not for us.