Answers to Nine Commonly Asked Questions
I know that I have a successful business idea. All I need is money. Why does all this have to be so complicated?
You may "know" that you have a successful idea, but that is not sufficient. If you wish to obtain financing, you have to demonstrate, in writing, to other people that your idea will be successful. Their money, after all, will be at risk; they cannot lend money based on your opinion. If "they" is a bank, the money that they are lending you is actually money, which belongs to their depositors, and they are naturally cautious. Many small businesses fail they want to be sure that you are one that succeeds!
You may believe that your issue is "money" many people do. However, the real business issues (that may prevent you from receiving a loan) are more likely to be your market, management skills, distribution network, pricing, or operating budget. For many people, money is an obstacle that ignores more critical issues.
What skills and experience do I need to run a business?
The skill and experience requirements of a business vary widely, but in general they include Attitude: A strong need to achieve, drive, abundant energy, the courage to take risks, persistence, self-confidence, flexibility, innovativeness, ability to get along with others, and Skills: Educational skills (reading, writing, arithmetic), professional or technical skills (specific experience in the line of business), entrepreneurial skills (past management experience or ownership of a business), and management skills (leading, organization, prioritizing).
Many lenders consider past experience in the line of business as crucial to your potential success. If you seek financing, be prepared to explain how your work history will contribute to your success as a business owner.
Who is my business team?
A successful business has at least four important partners: an accountant, a banker, a lawyer, and an insurance agent. Each of these people has specialized skills that can help a business succeed.
Why do small businesses fail?
Some studies have suggested that many small businesses fail within the first three years. Causes vary, but the primary reasons can usually be traced to lack of business planning, insufficient management skill, inadequate experience, and lack of outside advisors.
You can significantly increase the odds that you will be one that succeeds by going through a feasibility analysis process which forces you to examine many possible business start-up issues and questions. This is called writing a business plan which can range from a general sketch of your business and key business issues to a comprehensive analysis and description of the business and its operating environment.
Where can I learn more about running a business, and about my business in particular?
There are many basic business courses offered by the Massachusetts Small Business Development Center, along with free business management counseling and business management training videos. Also, your local library will have books and periodicals on business and possibly some business training videos. The appropriate trade association and small business owners in the same industry can be invaluable sources of information concerning your specific type of business or service.
To see a statewide listing of workshops offered by the MSBDC, visit our website at www.msbdc.org/training.
What do I have to prove to a bank or investor in order to get financing?
In general, you have to demonstrate that there is a market for your product or service that you have sufficient management skill to start and manage the business, and that there is sufficient cash flow from the business to repay the loan (shown by a projected budget).
What must I do to answer the questions that lenders will have of me?
The accepted practice is to develop a financing proposal that includes several parts of your business plan. At a minimum, the proposal should include a brief description of your planned business, a summary of the requested loan (use of funds, requested terms), management resumes, a personal financial statement, and a projected income statement for the first year (including an explanation and justification of income and expense items).
What is equity?
Equity is the money and/or assets, which you put into the business yourself. Banks rarely lend 100% of the funds required by a business, just as a bank rarely makes a mortgage for 100% of the value of a house. It is expected that you will put a part of the funds required into the business yourself. This shows that you are willing to risk your money in the business.
What is collateral?
Collateral are the assets you pledge as security on a loan. These assets may be a part of the business, or they may be personal in nature (equity in your house, for example.)
One of the key issues that a lender is concerned with is "How will I get repaid?" There are two potential sources of repayment, in general: cash flow from the successful business and the proceeds from the sale of your collateral should the business fail. Lenders usually prefer that the resale value of collateral be greater than the loan request.
The Massachusetts Small Business Development Center Network provides on-on-one business assistance to those wishing to start a new business venture or who are operating an existing small business. Additionally, the center provides many business management training courses. The MSBDC is here to help!
To receive services, call our office at 508-673-9783 or fill out a request for information form.