Financial Issues in Business Startup
A primary inhibitor of business start-up is that few people have the financial cushion to give up a job for the uncertain income of a start-up venture. In a recent survey, about 30% of new business founders identified inadequate funding as their biggest hurdle, and a similar amount said lenders were too conservative. About 15% reported being unable to find investors, and a similar amount claimed a lack of collateral.
The prospective new business owner approaching a lending institution should keep in mind the "five c's of credit:" character, cash flow, capital, collateral, and (economic) conditions. Character consists of the borrower's integrity, experience, and ability; particularly close attention is paid to a borrower's credit history, which is a matter of record. Should you decide to try to fund a startup through a commercial lender, the remaining criteria are addressed in the loan request.
The loan request should include a credit application, financial information such as tax returns and personal financial statements, and a brief business plan emphasizing projected financial performance of the new venture. The plan should demonstrate how the business will generate sufficient cash flow to repay the loan, specify collateral, and show the borrower's personal investment.
In addition to servicing the loan, cash flow should also cover operating expenses, and provide for some re-investment for the increasing financial demands of a start-up venture. As collateral, banks will often lend up to 80% of the market value of real estate, and up to 50% on business assets such as equipment, inventory, and current accounts receivable. Lenders and investors often require that the bulk of start-up monies be provided by the business owner. This assures these stakeholders that the owner is committed, and has confidence in the financial projections.
When the entrepreneur can not meet the requirements of commercial lenders, and does not have a favorable arrangement with partners or other investors, the remaining options are difficult and expensive. These options include public-sector guarantees, finance companies, and the venture capital market.
Even where the start-up investment consists largely of other people's money, the amount of financial risk for the entrepreneur is beyond what most can responsibly handle. For many with the financial means, the stress of bearing complete responsibility for the company's direction and performance is the discouraging factor.
Once the venture is off the ground, a new set of challenges faces the entrepreneur. A recent survey showed their major concerns, named by more than half of respondents, were: "getting new business/clients;" "managing my time;" and, "promoting my business." Another interesting question was what they missed about the corporate world. The top three responses were "company-paid health insurance," "a regular paycheck," and "retirement plans."
Various estimates have been made for the failure rate of business start-ups, based on various concepts of failure and of appropriate survey methods. The consensus seems to be that less than half of new businesses survive the start-up "trauma."
Perhaps, a major reason for what seems to be a high failure rate is that it is so easy to start a business. There is no institutionalized check of qualifications in the U.S.; on the contrary, our tax dollars fund the Small Business Administration and other agencies and programs that encourage business formation.
Another survey showed that over 80% of entrepreneurs would take a pay cut if that is what it took to keep the business going. Just over a third would sell the business, even if a good price were offered.
John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.
Latest News
 Columbus Dispatch | Ohio House Speaker Budish touts regionalism in his first address WKYC-TV, OH - ... to Ohioans working in startup companies and revive Ohio's cities and Ohio's spirit of entrepreneurialism and make the state a center for green jobs. ... New Ohio House leader wants tax break |
Entrepreneurialism And The Dwarf House PWO, France - To become an entrepreneur is enjoyable when you have a passion for a business idea you are passionate about. However, if you have to become an entrepreneur ... |
PEER 1 Selected to Join Microsoft BizSpark Program FOXBusiness - ... is committed to helping entrepreneurs to transform their ambitions into sustainable, dynamic businesses and to foster innovation and entrepreneurialism. ... |
Ashoka Brings Social Innovation and Entrepreneurship to ... PR Newswire (press release), NY - Due to these critical partnerships, the world's largest community of social entrepreneurs is taking social innovation and entrepreneurialism to new fields. ... |
Medley's Risk 13WHAM-TV, NY - Bob: This is the essence of entrepreneurialism, is to sell others on the risk and get them to invest in the risk. In this case, you’ve got a community ... |
 TechRadar UK | Marissa Mayer on the future of Google TechRadar UK, UK - "There was a tremendous amount of energy, scruffy entrepreneurialism and a sense of hope. We really felt we were working on something that might change the ... |
Twirling Towards Freedom: Letter to a Disgruntled Young Republican Culture11, VA - An open market is essential to the survival of our trademark entrepreneurialism; it is also the root of our historic success. Of course, as the present mess ... |
What now for Russian gold rush? Design Week, UK - 'In places like Almaty [the main commercial centre in Kazakhstan], you will find that there is a similar level of entrepreneurialism as in Moscow, ... |
It's time to get off our laurels – and innovate, innovate, innovate Globe and Mail, Canada - ... are required to spur successful innovation: access to capital; collaboration in pursuit of new ideas; and a culture that promotes entrepreneurialism. ... |
Finding Success When Going It Alone Law.com, CA - I realised that the mentality of our profession, and the conventional structure of law firms, often discourages entrepreneurialism. Decision making in firms ... |
Resources
-
Sorry there are no resources available at this time