If you think obtaining funding is your biggest priority, think again.
When it comes to starting a new business venture, most entrepreneurs focus solely on how they can get funding. Yet they often do not have a clear understanding of the funding process. Nor have they considered some of the many challenges of business ownership and how that might affect the amount of money they actually need.
“At least 90 percent of aspiring entrepreneurs ask how they can get financing, grants, or something related to capital,” says Brad Bunt, director of North Central Texas SBDC.
We spoke to some of the leading experts at America’s SBDC, a nationwide network of Small Business Development Centers (SBDCs), to get their insights on the most common questions asked by entrepreneurs. According to these experts, while obtaining funding was the most common issue, there are many more important things entrepreneurs should be thinking about first.
Here’s what experts say entrepreneurs should consider when buying or starting a business:
1. Your funding model is directly related to your exit plan
Joel Youngs has spent the past several years advising local business owners and other entrepreneurs throughout eastern Iowa and northwestern Illinois. He currently serves as the director of the Eastern Iowa SBDC and previously served as the director of Northwest Illinois SBDC. Combined with his experience as a successful business owner, he sheds some light on how to approach funding.
“When it comes to funding, what entrepreneurs should be thinking about is their exit plan. Your exit plan will guide you in the business planning process and help you make better funding choices. It will influence your decision as to whether to fund your business through investors, use your own money, or borrow the money,” says Youngs.
“If you plan on getting out of the business in just a few years, you may be less likely to incur borrowing costs and more likely to shop around for a better rate. On the other hand, if you intend to have the business for 20-plus years, you’re more likely to take on more debt. In reality, small differences in interest rates don’t matter,” he adds.
Drawing from his years of experience as a business consultant, as well as a banker and owner and operator of his own insurance and financial services company, Youngs also emphasizes the importance of an entrepreneur establishing a relationship with a lender.
“What matters is having a lender who believes in you and your business making money. Otherwise, there’s no money to put into your business in the first place. Don’t worry about shopping around for the best interest rate. What’s important is that you establish a relationship with a lender for ongoing funding,” says Youngs.
2. Always be prepared to face different situations in business
According to Youngs, small business owners need to be prepared for different situations. Once you’re in business, things may change. For instance, you may have more business than you can handle and need to borrow money so you can hire additional staff. Ideally, the lender will have enough faith in you to loan you more money.
“If your business is the Titanic and there’s an iceberg coming your way, we want to teach you how to steer your way around it,” Youngs says.
He points out that SBDC advisors teach business owners how to guide their ship. All business owners have the same fundamental business issues and SBDCs help them find solutions. These issues could be anything: struggling to make a profit, pricing their products, or even preparing for their exit and transitioning to new owners.
Youngs’s SBDC office in Eastern Iowa assists approximately 400 entrepreneurs each year. He helps them find solutions by analyzing their business financials and creating ways for them to be more efficient, develop strategies to re-structure the business, or even develop a transition plan.
3. When it comes to funding, most entrepreneurs are not bank ready
One of the primary roles of SBDCs is to help entrepreneurs become “bank ready” and find the means to fund their project. They give entrepreneurs guidance on how to repair credit and bring up their score. They also teach them how to prepare a cash flow projection and determine how much money they really need to borrow.
“Over 50 percent of entrepreneurs can’t meet the bank’s 10-20 percent equity injection requirement. Most entrepreneurs aren’t bank ready,” says Brad Bunt.
Bunt goes on to say that many entrepreneurs also don’t realize they have to allow time to generate a profit, and they need to borrow money for working capital. Otherwise, they can quickly run out of money.
Bunt has a long history as a senior leader for northern Texas SBDCs. For over 28 years, he’s worked with all types of businesses and helped them flourish. He says the majority of those who visit him ask how they can get grants, financing, or something related to capital.
Bunt reminds us that SBDCs have established relationships with lenders among the resources at their disposal. They help entrepreneurs vet which is the best way to get funding and save money. They speak with entrepreneurs about saving up to meet the bank’s equity injection requirement, or finding other ways the money can be raised, such as seller notes, borrowing from an IRA, or even a loan from a family member.
4. Have an exit plan in case the business doesn’t work out
Bunt stresses the importance of having some sort of exit strategy. Most entrepreneurs don’t have one. They aren’t prepared for unexpected circumstances, such as an illness, that may affect their ability to operate their business. If for some reason the business doesn’t work out, they need to have a back-up plan.
There are many options entrepreneurs can take to mitigate their risk if the business doesn’t work out the way they planned, if it’s too much to handle, or if it’s simply is no longer of interest. For one, they can simply sell the business. Working with an experienced business broker can be invaluable; not only can they connect the owner to qualified buyers, they can ensure the transaction goes smoothly while the owner focuses on running the business.
Entrepreneurs can also mitigate their risk by bringing on advisory or equity partners. They can even approach their competitors and see if they’re interested in buying them out. If they decide to do a liquidation closing, they should determine what can be liquidated and whether or not it would cover their loan.
5. Focus more on what your customers want — not what you want
When it comes to becoming a business owner, most people are encouraged to follow their passion. Maybe your friends say you make the best enchiladas and all you need is the money to buy a food truck. Or, maybe you’ve always dreamed of owning a specialty health food store and you just spotted a convenience store for sale in a great location.
Katie Van Dyke is director of the Ohio SBDC at Cleveland State University and has spent the past 10 years supporting local businesses and entrepreneurs in the Cleveland area. Through her work as director of the Small Business Development Center, she provides assistance, training and advice. She has developed a curriculum in entrepreneurship, and has taught classes in business and marketing.
Van Dyke emphasizes the importance of getting to know your potential customers.
“Most entrepreneurs focus too heavily on what they think customers want. Instead, they should be focusing on having open and honest conversations with potential customers,” she says.
Connecting and communicating with potential customers can provide entrepreneurs with invaluable data and insight. This could mean testing products through a local farmers market, or even with friends and family, before investing in a full-scale business venture.
6. Take advantage of your local SBDC and the services it offers
SBDCs are a valuable resource for all entrepreneurs. There are nearly 1,000 local centers across the United States that provide no-cost business consulting and low-cost training. Their professional advisors have a breadth of knowledge on deal structuring, financing, growth strategies, and exit planning. They also have great connections, including relationships with local banks. You can find the nearest SBDC in your area by looking it up on America’s SBDC website.
About the Author: Bob House is president for BizBuySell.com and BizQuest.com, the internet’s largest and most heavily trafficked business-for-sale marketplaces. Follow BizBuySell on Twitter @bizbuysell.