Two big challenges for a small business owner are securing the financing needed to start a business and finding the funds to stay open. Startups are the hardest to finance; their success ratio is low because of their lack of capital. Borrowing should start even before a business is created; an entrepreneur needs a good personal credit record and demonstrable management experience.

Eighty-five percent of small businesses borrow from a commercial bank. The other 15% turn to lending clubs, finance companies, online sources, and other lenders of whom they should be wary.

Smaller loans are hard to get because commercial banks find another lending more attractive, requiring less effort to review and administer. Other loans tend to carry less risk and be more profitable. Banks are leery of lending to small-business owners for another reason. Lenders have found people will say anything to get money to start a business, and when sales are less than expected, they will say anything to delay paying it back.

Many start-ups don’t need a large capital, only small loans of $10,000 or $15,000. A bank sees these at the top of the scale for risk and the bottom of the scale for reward. That has to do with the nature of start-ups. Sixty percent of them involve storefronts offering food or craft business, a candy store, or a yogurt store.

Banks granting credit to small-business owners, often impose covenants. Once an afterthought, they are now common, and they change every time an owner renews his line of credit. The Federal Reserve System encourages banks to impose and enforce covenants despite the strengthening recovery and better borrower repayment records. Covenants are binding agreements restricting a borrower’s ability to use some assets, especially those offered as collateral. They also limit using funds for shareholder dividends. Banks want equity to stay in the company to secure the loan.

Banks are more careful upfront because it is harder and more expensive to perform audits. They will require financial statements but want them confirmed by outside sources. In-house statements look nice but look even better endorsed by CPAs.

Many planning to start a business make their first stop at SCORE. Most are just looking for general information, but some have tried and either thought better of it or failed. Few of these would-be entrepreneurs realize that how they’ve maintained their personal finances has a huge impact on whether they’ll secure financing. Many who approach SCORE lack stellar credit ratings, and that’s a turnoff to lenders. Some would-be entrepreneurs have poor credit because they lost their jobs. Others never applied for a credit card and have no record with the three major credit-reporting agencies. Half lack any management experience which demonstrates an ability to manage cash flow.

Only one in 10 will have a good business plan. A good business plan shows they have a good basis for starting a business. Business plans are fluid, and they must be continually refined and adjusted to demonstrate to a lender you’re on top of the situation

In the end, those giving serious consideration to starting their own businesses will find what those already experienced know very well. The lender expects hands-on involvement and some personal financial commitment. This could mean putting up one’s primary residence as collateral. And it will mean saying goodbye to working eight hours a day, five days a week. You may be your own boss, but you’re going to have an 80-hour week, not a 40-hour workweek.

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