5 Startup Funding Myths
It’s time to dispel some startup funding myths. If you’re going to do this, you want to do it right and with all the facts.
1. Your business plan is your golden ticket to financing
Contrary to popular belief, nobody invests in the business plan itself. You still need to have one because investors will want to see your ideas and information on paper...but ultimately, they’re going to choose to invest in a company, in a product, and in the people. Not the plan.
2. Venture capital financing is a hot opportunity
If you want to reliably fund your business, then be aware that getting venture capital funding is rare and highly competitive. The startups and businesses that tend to secure this type of capital are the ones that demonstrate long-term growth potential and a good chance of ROI. So unless you’re an entrepreneur with a successful track record and a team of resources, you’re going to have to fight a lot harder to get this kind of financing for your startup.
3. Bank loans are the best option for funding a new business
Not necessarily. First off, if you take out a personal business loan, there’s obviously a certain degree of risk. It’s also not very common for a bank to finance a startup to begin with. There are federal banking laws in place that restrict banks from investing in businesses so as to avoid taking savings from depositors and investing it into high-risk ventures. Imagine if it was your money that was invested into a business venture failed...not great, right?
This is also why you won’t see many banks lending money to startups. Federal regulators want to play it safe (for good reason) by putting that money towards conservative loans with solid collateral. Unfortunately, startups are often deemed too risky and usually don’t come with enough collateral. You can put up your own personal collateral, like your home, if you want to receive financing for your business but just keep in mind that it’s a great personal risk.
4. "I started this business with $100 in my Bank Account"
We all love a good success story because it makes us feel like, yes, we too can start a business with $100 while working out of our garage! And it happens. But it is the exception rather than the rule and you should go into your business startup being fully aware that you’ll likely be investing a good portion of your own money at the beginning.
So, don’t quit your day job! You will be busy and struggle to find enough hours in the day sometimes but you need to have a steady source of income while your startup is still, well, starting up.
There is also the option of going through SBA (Small Business Association) to get a loan for your small business or startup. SBA works with certified lenders, aka banks, and if you go through this process, it will almost always be through a local bank, if not your own bank.
If you want to get a loan for your startup, the normal requirement from SBA is for the business owner to put up at least a third of the required capital. The remaining amount has to be guaranteed by reasonable assets (business or personal).
5. Getting Funding From Friends and Family is Fail-Safe
If there had to be just a single “must know” key point for fledgling entrepreneurs, it would be that you understand what money you need and that it is at risk. Basically, know how much you’re betting and don’t bet money you can’t afford to lose.
For example, let’s say you start a business, get investments from friends and family...and then spend the next 10 years trying to get it to work without any degree of success. The only thing you’ll have achieved is more debt because you felt obligated to keep trying since you were backed by these people. In reality, you would have been better off shutting it down early on and cutting your losses.
In fact, did you know that federal securities laws discourage getting business investments from people who aren’t wealthy, savvy investors because there is often a lack of understanding of the risks involved in such investments? It’s fantastic if you have friends or family willing to invest in your business because it means that they believe in you...but make sure you do them the courtesy of clearly outlining the risks and explaining that there is always the chance they may not see a return on their investment.
As with anything, make sure you do your research and find out for yourself what the best funding options are for your startup and circumstances!