Just about anywhere in life — in school, personal endeavors and especially business — knowledge is a powerful tool. That’s especially true when headed to the capital markets for funding that serves as working capital, and it is especially true for the smallest of businesses, the ones getting off the ground, where the owners are most in need of capital to transform ideas into the first stages of operation.
But even the most basic levels of education and self-awareness can prove elusive, detrimentally so. To that end, New Business Funders, the FinTech connecting startups with lines of credit, released a guide earlier this month that focuses on how to avoid glaring pitfalls that might do more than just slow down the loan process and may, in fact, stymie funding altogether.
Founder and CEO Troy Bohlke told PYMNTS that, all too often, smaller players looking for capital tend to rely on their own personal funds, especially if they are unable to successfully land in front of hedge funds, angel investors or traditional banking firms. Personal credit cards are a risky way to do business, and savings “are meant to be just that — savings,” he said. “Once that’s gone, it’s gone.” The key to a successful initial launch for SMBs, he added, “is to use other people’s money” and to build credit in a continuous loop, enabling a virtuous cycle of access to funding that will lead to the purchase of “more marketing, inventory and tools” that are essential for healthy growth.
Good credit is an imperative, Bohlke maintained, precisely because that metric is one where banks will find some reassurance in offering credit, especially in an environment where young firms typically have no sales to help dictate loan amounts and terms. Loans remain a more favorable funding option for the borrower, stated Bohlke, who went on to say that those nascent business owners who give up equity are, in effect, giving up ownership for what is “the most expensive form of money,” especially in the event of being successful but having given up control of a firm or, down the line, negotiating a sale as an exit strategy.
High stakes, to be sure, and SMBs, said Bohlke, tend to go about seeking funding the wrong way, chiefly through a dearth of pertinent information — or worse, by offering up information that is riddled with errors. The most urgent challenge facing SMBs, said Bohlke, remains funding and among the most important presentations to be given over to a would-be lender includes the pro forma financial statement, which, in an instant, can lay bare whether a startup’s assumptions are realistic or fanciful. “The business owner who makes the assumptions on the pro forma, that single piece of paper,” said Bohlke, “saying, well, they can sell this amount of product with only five sales people,” may be making overly optimistic assumptions (and thus unrealistic assumptions on revenues, profits and, ultimately, the ability to cover loans or offer returns to investors). Likewise, not building in assumptions for chargebacks, returns, warranties and other costs shows that owners may not understand the risks of business. At times, added the executive, “startup plans may not even understand the proper price point” for a good or service.
Within the B2B realm, stated Bohlke, the attraction of investors and lenders is to the sense of a firm’s competitive advantage, focused on the eventuality of “being bigger, better, faster” than players already in the market. Future educational efforts, said Bohlke, will focus on “FICO versus fundraising,” where the former is “just a beginning number.”