Mistakes to Avoid When Seeking Start-up Finance

In our continuing series on business finance, we’ve been covering many of the common questions new business owners have on funding. This week, we’re discussing the things to avoid when approaching lenders for start-up finance.

No matter what industry your new business is in, you’re going to eventually need funding. Some entrepreneurs self-finance, while many will approach a financial institution for a business loan. These lenders have dealt with thousands of entrepreneurs and have seen it all. They can’t be swayed by impactful stories, or what a difference this business will make in the owner’s life. Instead, they’re on the lookout for sure-fire bets that will ensure they recoup their investment with minimum fuss.

The onus is on the new entrepreneur to make this case. A pitfall many fall into is sleepwalking directly into one of the red flags that will cause lenders to turn down their application. Here are some of the common things to avoid when approaching a lender for financial assistance.

Lack of Research

Not every lender is created equally. Different lenders have track records for preferring to deal with certain industries. Before approaching a financial institution looking for a loan, try to establish the kinds of industries they are heavily involved in and if there’s compatibility. To give a specific example, Vancouver credit union, Vancity, has shown a preference for lending to green businesses that have sustainability at their core. Try to only focus on lenders who are compatible with your industry.

No Business Plan

After you walk into a financial institution and exchange pleasantries, you’ll be asked to present your business plan. If you show up without one, your chances of securing finance are likely dead on arrival. The importance of a business plan can’t be overstated. It communicates your long-term goals and your plan for how to achieve them. While the business may seem a golden idea in your head, a business plan effectively communicates the plan to others. Without it, there’s no chance of investment.

Don’t Fly Solo

A problem shared is a problem halved. Lenders are far more likely to look on an application favourably if it comes from more than one person. Having at least two people share in the decision making (and risk) calms the nerves of lenders and is seen as a safer bet. We’ve all heard stories of how some businesses don’t allow their CEO and COO to take the same flights. This is a similar principle. If anything happens to one owner, financial institutions don’t want that to mean their investment has gone down the drain.

Poor Personal Track Record

Many things come under consideration when a loan application is being assessed. One aspect that will be examined is the personal financial history of each party. If there’s a track record of heavy personal debt and poor credit history it will likely scupper the loan application. It’s not an easy thing to fix overnight but it’s wise to try and clean up your own personal financial situation before looking for business finance.

Failure to Nail the Basics

There’s a lot a business (even new ones) can achieve without finance. Marketing, sales, revenue growth, are all things financial institutions will want to see. They need to be convinced you have a grasp of the fundamentals of running a business and they only thing preventing your business from taking off is a lack of financial muscle. Have a clear plan of how you will allocate the funding you receive and how this will impact on the business.

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