Start Up Business Loans Are Hard to Get
It’s no secret and should not surprise most, it’s relatively difficult to obtain business financing for a start-up business specifically in getting a conventional bank loan. These financing institutions are in the business of making money… not losing it based on a ‘hunch’ or unproven business. So, if you are a start-up or at least thinking of starting a business, how can you solve this problem of getting a business loan from a conventional bank? Here’s the key: don’t be a start-up business. Easily said, but not difficult to accomplish if you practice discipline and commitment.
The main reasons businesses fail in obtaining financing are:
- Lack of Concept
- Lack of Market Proof
- Low Profit Margins
- Lack of Business and / or Personal Assets for Collateral
Today, we’ll go over Lack of Market Proof.
How to Gain Proof of Market
It’s hard to produce and sell products and services to a market that doesn’t exist or is too small. Start-up businesses fail to consider the size and profitability of the market that they intend to serve. Due to the many options made available to aspiring start-up businesses via social media and other online platforms such as Google or Yahoo, it’s relatively simple to find out the market potential for a business. The recommendation is to apply the MVP or “minimum viable product” principle which means you take a simple prototype of your main product and / or service offering and get it to the target market quickly. The purpose of doing this is to gain quick feedback for necessary revisions and proof that the market exists. Also, to really get a flavor of the market, hit the streets and ask prospective customers. Identify several suspects for your product and / or service offering, and reach out to them with a phone call, direct mail survey, or in person visit. The primary purpose of these activities is to gain feedback and eventually a sale if mutually beneficial.
From what I’ve observed over the last decade in working with and observing start-ups, it takes 12 to 18 months to really gain traction in a market. Please don’t confuse this with the testing of the start-up idea in the market. This should be quick to notice taking no more than 30 days. In other words, if you’re MVP doesn’t garner enough feedback and ultimately sales, then you either abort mission or revise / re-test.
How do you strengthen your case for business financing with proof of market? Once you have proof of market for your business via sales and proof of cash received via business bank statements, include these documents in the business financing package. Show how the business loan will either enhance the ability to gain more market share or grow profit margins through business growth.