When I talk with small businesses they all tell me they need money to grow, but then in their second breath they also say that there is no money for small businesses. There is a lot of fear surrounding business financing.
The first question I get from small and mid-sized businesses “Where is the money?” What they really mean is “Where do I start? Do I go to my local bank or how do I find an investor?”
I understand that many businesses were hurt badly by the past recession when their credit lines were pulled or they got declined when they approached financing sources, so there is much apprehension when looking down the financing path.
But there is a lot of opportunity if you can understand and navigate the maze of business financing.
The Business Financing Environment
A primary obstacle to business growth is financing—where to find it and how to get it. And money is almost always in short supply for small and mid-sized businesses, which are the engines of economic and job growth in the United States.
While large corporations seem to have significant stockpiles of excess cash on hand, small and mid-sized businesses are often struggling to secure the capital they need to grow.
In today’s economy, potential lenders and investors are increasingly selective about who gains access to money. Overall they want to partner with well run businesses, to decrease the risk of losing their investment.
The goal for small businesses is not to look for the magic bullet, but to implement effective strategies to build consistent growth and profitability and to institute efficient operations to manage costs.
Sources of Business Financing
In most people’s minds, the magic question is, “Where is the money?” And in the United States, there are a multitude of sources. Here are some financing source statistics for you to consider:
- Lending Institutions
- 6,096 commercial banks in the United States
- 7,000 community banks
- 6,952 federal and state Chartered Credit Unions
- Investment Organizations
- 842 active venture capital (VC) firms
- 2,600 private equity (PE) firms
- 318,480 active angel investors in 2011
Family and Friends
Many experts estimate that three to four times the amount from all sources comes from family and friends. They are the primary source of equity investment in small businesses.
Yet many small businesses shy away from approaching family and friends even though, for many businesses this form of financing may be their best path. To be successful, it needs to be treated in the same way as approaching a lender or investor.
The Big Issue – Getting Approved
A study by Biz2Credit provides some very interesting information based on primary data submitted by more than 1,000 small business owners who applied for funding on Biz2Credit’s online lending platform. Biz2Credit analyzed loan requests ranging from $25,000 to $3 million from companies in business more than two years with an average credit score above 680.
Which bank you approach can make a huge difference in whether you are successful in obtaining financing. Community banks have been the primary financing source for small and mid-sized businesses. And they approve half of the applications they receive.
Many businesses assume that the big banks are the way to go. While the big banks (JP Morgan Chase, Bank of American, Citigroup, Wells Fargo and Goldman Sachs) assets are equal to 56 percent of the U.S. economy, they only approve a quarter of applications. And remember they are the financiers to major corporations. You may find that approaching your community bank or credit union is a better path for you.
The approval process from investors is even tougher than with lenders.
- For every 100 businesses that approach investors:
- Only 10 may get a close look
- Just one may get funding
This has been the business model for investors for decades. Understand that this path is highly competitive and requires more preparation and may have higher hurdles than does the lending community.
What You Need To Do
With this type of competition for capital, you need to be highly prepared, have a comprehensive business plan backed by in-depth research and a realistic business model, and have a sizzling presentation before approaching a financing source.
A major component to winning business financing is to provide a compelling story detailing why investing in your business is not only a safe investment, but also a significant growth opportunity for that lender or investor.
It is your responsibility to show the financing source how you have grown—and with their help—how their investment will build an even stronger, higher-growth, and more-profitable business–rewarding them for partnering with you.
So the process of winning business financing will require you to understand all the financing opportunities available to you in your geographic location. This means researching all the lenders and investors in your area and understanding what each financing source requires.
You will need to meet with each and ask them which type of businesses they finance and what their expectations are. Only after you truly understand what they require will you be in a position to develop a proposal.
Remember, the competition is steep, but if you meet—and exceed—their requirements, you will be in a prime position to win the business financing you need.
Diane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.