| A primary inhibitor of business start-up is that few | | | | requirements of commercial lenders, and does not |
| people have the financial cushion to give up a job for | | | | have a favorable arrangement with partners or other |
| the uncertain income of a start-up venture. In a | | | | investors, the remaining options are difficult and |
| recent survey, about 30% of new business founders | | | | expensive. These options include public-sector |
| identified inadequate funding as their biggest hurdle, | | | | guarantees, finance companies, and the venture |
| and a similar amount said lenders were too | | | | capital market. |
| conservative. About 15% reported being unable to | | | | Even where the start-up investment consists largely |
| find investors, and a similar amount claimed a lack of | | | | of other people's money, the amount of financial risk |
| collateral. | | | | for the entrepreneur is beyond what most can |
| The prospective new business owner approaching a | | | | responsibly handle. For many with the financial means, |
| lending institution should keep in mind the "five c's of | | | | the stress of bearing complete responsibility for the |
| credit:" character, cash flow, capital, collateral, and | | | | company's direction and performance is the |
| (economic) conditions. Character consists of the | | | | discouraging factor. |
| borrower's integrity, experience, and ability; | | | | Once the venture is off the ground, a new set of |
| particularly close attention is paid to a borrower's | | | | challenges faces the entrepreneur. A recent survey |
| credit history, which is a matter of record. Should | | | | showed their major concerns, named by more than |
| you decide to try to fund a startup through a | | | | half of respondents, were: "getting new business |
| commercial lender, the remaining criteria are | | | | clients;" "managing my time;" and, "promoting my |
| addressed in the loan request. | | | | business." Another interesting question was what |
| The loan request should include a credit application, | | | | they missed about the corporate world. The top |
| financial information such as tax returns and personal | | | | three responses were "company-paid health |
| financial statements, and a brief business plan | | | | insurance," "a regular paycheck," and "retirement |
| emphasizing projected financial performance of the | | | | plans." |
| new venture. The plan should demonstrate how the | | | | Various estimates have been made for the failure |
| business will generate sufficient cash flow to repay | | | | rate of business start-ups, based on various concepts |
| the loan, specify collateral, and show the borrower's | | | | of failure and of appropriate survey methods. The |
| personal investment. | | | | consensus seems to be that less than half of new |
| In addition to servicing the loan, cash flow should also | | | | businesses survive the start-up "trauma." |
| cover operating expenses, and provide for some | | | | Perhaps, a major reason for what seems to be a |
| re-investment for the increasing financial demands of | | | | high failure rate is that it is so easy to start a |
| a start-up venture. As collateral, banks will often lend | | | | business. There is no institutionalized check of |
| up to 80% of the market value of real estate, and | | | | qualifications in the U.S.; on the contrary, our tax |
| up to 50% on business assets such as equipment, | | | | dollars fund the Small Business Administration and |
| inventory, and current accounts receivable. Lenders | | | | other agencies and programs that encourage |
| and investors often require that the bulk of start-up | | | | business formation. |
| monies be provided by the business owner. This | | | | Another survey showed that over 80% of |
| assures these stakeholders that the owner is | | | | entrepreneurs would take a pay cut if that is what it |
| committed, and has confidence in the financial | | | | took to keep the business going. Just over a third |
| projections. | | | | would sell the business, even if a good price were |
| When the entrepreneur can not meet the | | | | offered. |