• August 1, 2013
2 minutes Read
There’s a secret in startup financing: it’s really hard—if not impossible—to get a loan.
Why? Well, you have to think like a lender. They take on a lot of risk when they lend, and no business is riskier than a startup. How risky? According to Forbes, a whopping eight out of ten new businesses fail in the first three years.
That’s a lot of loss for a potential lender.
To figure out what so many startups are doing wrong, we talked to CAN Capital CEO, Dan DeMeo. He gave us the lowdown on what lenders look for when determining if a business is a good risk, and how startups can have a better chance of getting a business loan when—and this is important—they have a little time under their belts.
Figure out your market.
To start, DeMeo said you have to figure out your product and your market. There are two ways you can do this. In his words, you can “build products and find the market, or study markets and decide what products fit.” Ask yourself a few questions. Does your product or service already exist in the marketplace? Is it priced well? Where are you going to distribute it? How are you going to gain awareness? Basically, you have to consider the complete marketing mix.
Show that you’re a real business.
If you’ve fully answered those questions and think you’re ready to become a business owner, what’s next? Any serious entrepreneur needs a simple, yet essential, tax ID. Demeo said, “it’s the first order of required information.” It lets lenders know you’re a real, live business, and allows you to incorporate and open a business bank account.
Keep great records.
This leads to another big step: get a business bank account. You need to keep your personal finances separate from your business finances to maintain good records, which are key. According to DeMeo, you have to “be conscientious about your books and records….If you’re not able to do your own accounting and bookkeeping, get someone in there to help.” Without financial acumen, the “likelihood of getting financing diminishes.”
Be prepared to bootstrap.
We know what you’re going to say. You’re probably wondering where you’ll get the money to put into that account. The answer, unfortunately, is a little hard to hear. There aren’t a lot of options for startups. Yes, Small Business Administration microloans and 7(a) loans might be available, but they can take ages and a mound of paperwork to secure. It might be easier to treat starting your business like starting your car. You have to give it some gas first. Those who can’t get a little gas from the SBA or banks sometimes run their businesses off of savings; some ask friends and family. It’s not as odd as it sounds. There are even services now that can help you raise money and pay back your friendly lenders automatically.
The point is to do what you can, as soon as you can, to get yourself established. DeMeo emphasized that if you “take the traditional path…you have to have been in business for an extraordinary amount of time.” There are alternatives, like CAN Capital, but CAN Capital still needs to see some bank statements and a predictable pattern. The short of it is—you have to “understand how to make money, have costs that aren’t outrunning your revenue, and be a viable business that hasn’t hit speedbumps along the way.”
Speedbumps might be a past-due rent check or a recent bankruptcy. Excessive liens and poor personal credit can take you out of the running. So, paying your rent or mortgage on time and keeping your credit clean are important, too.
Lastly, it’s not enough to have a good idea; you have to be able to implement that idea. Our CEO recommends seeking expert advice. Business owners need to “look for people who have had similar experiences,” DeMeo said. “Try and study as much as you can. Have a great idea and great execution.”