“No one will lend you money for your new business simply based on a business plan, no matter how well crafted… However, no one will lend you money without it.”
–Grant Cooper, Founder & President, WinningBusinessPlan.com
There are several conditions a banker or funder will need to satisfy before betting on a new venture.
First, the applicant must have a good credit record. When an entrepreneur is asking others for their money, it must be shown that they have previously taken care of their own. Poor credit is a huge red flag to banks and venture capitalists.
Second, the applicant should have a detailed business plan that covers everything, including a biographical profile, an executive summary of the project, marketing plans, capitalization needs, site selection and cost factors, breakeven analysis, and in-depth business research. In fact, funders often perceive that gathering the resources to create a well-crafted business plan can be an accurate predictor of future success.
Finally, applicants for funding must, in most cases, have collateral. You may ask, “Why should I need collateral if the idea is great and I have good credit with a stable background?” The simple answer, as I discussed earlier, is that small businesses often don’t make it, with failure rates that cause potential investors to cringe. According to one study, here are the 10 most important reasons that small businesses fail:
1) Lack of experience, 2) insufficient capital, 3) poor location, 4) poor inventory management, 5) over-investment in fixed assets, 6) poor credit arrangements, 7) personal use of business funds, 8) unexpected growth, 9) competition, and 10) low sales.
However, you can be sure that banks desperately want to lend money for business startups since it is a large part of how they maintain their profitability. Particularly in today’s low interest environment, where banks can acquire their capital at historically low rates, they are eager to finance new businesses, if the risk is understandable and manageable. While they do generally require some form of collateral for start-up loans, make no mistake about it, the bank or funding agency doesn’t want to go through the arduous process of repossessing your client’s collateral, they are very much hoping for the business to succeed.