Ask for SCORE: Financing options for a start-up business | Economic news
QUESTION: I want to start my own business. I have heard that it is quite difficult to obtain bank financing for a start-up operation. What advice can you offer?
ANSWER: For starters, some types of businesses will encounter resistance from lenders, due to their failure rate. Restaurants and specialty stores, such as bookstores, gift shops, hardware and office supply companies, that compete with online and big-box stores are prime examples.
Unless your product or service fills an underserved niche, you’ll be fighting an uphill battle. Niche marketing is an advertising strategy that targets a section or subset of an entire market. Rather than marketing to anyone and everyone, it focuses on a particular group of potential customers who are most likely to benefit from your product or service.
Banks view start-ups as risky, especially if the entrepreneur is unproven. So unless you have worked and have experience in the type of business you are considering, your chances of obtaining bank financing are limited.
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An entrepreneur may have a better chance of getting a bank loan if they buy an existing business with a solid track record. In this case, you have a loyal clientele, knowledgeable employees, and a good location, with furniture, fixtures, supplies, and equipment in place.
Another avenue of less resistance is to consider buying a franchise. Here you have a proven business model to work with and you are guided, to some degree, by the franchise company.
There are many franchise opportunities, but before investing, be sure to investigate thoroughly by contacting other franchisees. Also read the franchise agreement carefully and ask your lawyer to read it before signing it.
A recent Wall Street Journal article pointed out that these entities are among the most common types of business loans supported by the Small Business Administration because they follow a proven business model.
It should be noted that the SBA does not lend money. On the contrary, it protects banks against losses due to borrower default and its costs are added to the interest rate charged by the lender.
For some, if you don’t have enough working capital, your chances of success are questionable. In addition to start-up and/or acquisition expenses, you’ll need six to nine months of working capital to deal with seasonal and other events that affect sales.
My best advice is to start building a written business plan now that includes research-based 12-24 month income and expense projections. Many draft business plans are available for purchase online. SCORE also offers a free business plan available at https://richmond.score.org/resource/business-planning-financial-statements-template-gallery. This way, you can determine your chances of success before you spend the first penny.
Gray Poehler volunteers with the Richmond chapter of SCORE, Counselors to America’s Small Business. To ask a question or seek free, confidential business advice, visit richmond.score.org/mentors. Learn more about SCORE’s workshops on the website or by calling (804) 350-3569.