Starting a business is a lot like being a student because every step in the process brings with it a new lesson. That’s especially true when you look for startup funding to get your business off the ground. You’ll learn a great deal about where and how to look for money — and where and how not to look for it.
Searching for funding is often one of the most stressful yet rewarding parts of the process. And the lessons you'll learn will benefit you and your business forever. Here are five important lessons you’ll learn while looking for startup funding:
You’re going to learn an awful lot about the different financing options available for startups as you search for funding — including which options might be out of reach. Startups often run into a brick wall with conventional bank loans unless they have good credit scores and a few years of revenue already in the books. What's more, it can be difficult to get U.S. Small Business Association (SBA) loans without a good credit score and a few years of financial statements. For brand new businesses, these options simply aren't feasible. If you have problems obtaining conventional loans, you’ll learn to widen your startup funding search. Alternative options include lines of credit from banks and credit unions, peer-to-peer loans from fintech firms and P2P platforms, equipment financing from banks and independent lenders, non- merchant cash advances and crowdfunding. You’ll also learn about different credit card-based financing options.
One of the biggest lessons you’ll learn while looking for startup funding is the importance of your credit score . Banks and other lenders will take a good, hard look at your personal and business credit histories to determine how well you handle money and gauge your ability to meet financial obligations. A low score — usually 600 or lower — tells them you might be a bad risk for a loan. That’s the case even if your business is a financial success with a perfect record of paying its bills on time. Even if you get approved for a loan, you’ll probably get less money than you asked for and get stuck with unfavorable terms. A good to excellent score, on the other hand, can open up a lot of doors. Banks tend to be very strict about credit scores, while the SBA typically requires a score of at least 680 to qualify for an SBA loan. Private lenders and venture capital investors are more flexible because they’re more willing to take on risk.
Just about any entrepreneur gets an education in being turned down for loans, so don’t be discouraged if your first few applications wind up in the rejection pile. The important thing is to use this as a learning experience and to take the right steps after being rejected for a business loan . Take the time to find out not only why you were rejected but also how to correct the problem so you’ll be more successful the next time. In addition to a low credit score, reasons many startups are rejected include:
If your main problem is a low credit score, you’ll need to learn how to fix improve your credit score . This can be done by keeping accounts open even if you don’t use them, monitoring your personal and business credit reports to see if anything needs to be fixed and setting up automatic credit card payments. If you’ve been turned down for a bank loan because of too few years in business or weak cash flow, you’re better off approaching private lenders or investors who are more willing to fund new businesses. If the loan amount is the problem, adjust it higher or lower as needed. If poor planning is the culprit, go back to the drawing board by bolstering your business plan and offering more data to back up your financial projections.
One of the most common mistakes for entrepreneurs who seek startup funds is believing that a cool product or service will get them across the finish line with lenders and investors. You’ll learn quickly that the money people want much more than that — regardless of what the judges on "Shark Tank" have led you to believe. Looking for startup funding means learning how to sell yourself as a business owner. You need to make a convincing case that there’s sufficient demand to support your business, backed by concrete data. You also need to convince lenders and investors that you have the skills, experience, business structure, industry connections and client base to succeed. Learning how to sell yourself, your business and your vision will become one of the most important steps to getting the funding you want. Related: 5 Creative Ways to Fund Your Startup Without Investors
Learning how to look for startup funding also means learning how to ask for help when you run into problems. If you find yourself unable to get the financing you need at the terms you desire, don’t be afraid to ask trusted mentors, industry professionals and business associates for advice. You can also turn to companies like Seek Business Capital , which provides consulting services and funding procurement to small businesses nationwide. Seek Capital handles the hard work searching and applying for financing to free you up to focus on growing your business. You can get prequalified in as little as 20 minutes, get a funding estimate within a matter of hours as well as the potential for same-day funding approvals. You’ll spend money only if and when you are approved for financing and pay interest only on what you use. Having dedicated professionals on your side can greatly improve your chances of getting the funding you need for your startup. See: 7 Fears to Overcome Before Starting Your Business
Approaching lenders and investors for money is a challenge for any startup, but it can also be a valuable learning experience. No matter how hard it might seem to get funding, it’s important to stay positive, learn from the process and prepare yourself to make a stronger case the next time you apply for a business loan . More From Seek
Business Loan Resources
Photo credit: Happy Together/Shutterstock.com