Lets face it. Start up business financing is considered high risk. I get so many business owners that ask me why start up business loans and equipment leases are at a higher rate then what is offered to established businesses,
And the answer is simple.
A well established business has a track record. It has an established client base. The banks feel more comfortable with them because they have, in most cases, established a business credit report.
While a startup is on the complete opposite end of the spectrum. The statistic is that within 3 years of opening their doors, 92% of all start-up businesses will fail.
How Are StartUp Businesses Obtaining Financing
While many entrepreneurs are using retirement accounts and their savings accounts to partially fund their start-ups, the majority of new companies require at least some investment capital or financing to get off the ground.
How easy it will be for you to obtain a loan or attract investors will depend largely on how risky a venture your company appears to be to lenders and those looking to invest.
How To Increase Your Chances Of Getting The Start Up Financing You Need
Although every institution and individual has their own definition of “high risk,” self-evaluation can help give you an idea of how your company is likely to be perceived, so that you can take the right approach.
Some characteristics of start-ups that can contribute to a high risk classification include:
- Lack of Experience. A start-up is, of course, a new venture, but investors and financial institutions want to know that the person at the helm of the new company has experience.
If you’ve never owned a business before and don’t have any prior work history in the field or niche of your start-up, there may be concerns about how well you’ll be able to operate the company.
The experience levels of any key executives that you already have in place will likely be considered as well.
- Risky Industries. Some types of businesses are more likely to fail than others. Investors and financial institutions may classify restaurants, consulting businesses, retail establishments, telemarketing firms and some online businesses like social media sites and dating sites as higher risks before the even delve into the business plan.
- Incomplete or Unbalanced Business Plan. When you’re trying to secure funding for a startup, all you have to show for your business is your business plan. Financial institutions and investors will want to see that you have taken the time to put together a thorough plan with well thought-out risks and challenges and a clear vision of your target market. Otherwise, your business may seem high risk.
- High Demands for Initial Capital. If your business is going to require an investment of over $1 billion to get going, you’re likely to find yourself with a high risk classification regardless of what industry you’re in and how solid your business plan and industry are. Investors will worry that such a sizable initial investment will never pay off, and financial institutions often have caps well below seven figures for funding start-ups.
- Success Tied to Government Regulations. Startups that are relying on tax credits or government programs or that offer a product that must be approved by a government body like the U.S. Food and Drug Administration are more likely to be thought of as high risk. Laws and regulations are updated frequently, and there’s no guarantee that what’s allowed under the current system will remain. Products that must be approved may not be as risky if they have already earned credentials from the appropriate body.
As always if you are seeking startup business financing, please feel free to contact us! We specialize in helping new business owners obtain the financing they need, at the lowest rate possible!