Applying for finance: The five common mistakes made by startups
When you decide to apply for a loan to kick-start your firm’s growth, it’s a daunting task as much as it is an exciting one.
Essentially, you’re putting your business out there and opening it up to potential scrutiny. This means you have to find a balance between making your business an attractive proposition, while remaining realistic about your financial achievements to date and what the short-term future has in store.
In all the excitement, mistakes are common. Here are five mistakes and some sensible solutions to get you off on the right foot.
Not having an up-to-scratch business plan
Any bank, lender, or other funding source will want to know why you want the money, what you’re going to use it for, and, ultimately, why it’s worthwhile them lending to you (that is, how you’re going to make them more money in the long-run).
If your business plan is just pie in the sky or hasn’t been put together well enough, then either no one will want to lend you any money, or the money you are lent will be given to you at a really poor rate.
Being able to quantify your projected growth through sturdy financials is a must, and should be at the heart of your business plan.
Trying to go it alone
When you’re the proud owner of a startup or scaleup, it may be tempting to take on as much as possible, and keep everything in-house in order to protect “your baby”.
But enlisting a professional to assist with your business plan, until you’re good enough to do it yourself, is a very sound investment.
There are many startups and scaleups whose owners lack the specific accountancy experience required, and there is absolutely no shame in asking a professional help to ensure you have a proper business plan.
As hinted above, lenders will eat you alive if you can’t back up your finance application with a sturdy business plan. You need to wow potential investors and funders with your strategy if they are to give you any money, so it’s worth committing time and resource to it.
Taking the first offer on the table
It’s understandable that, in their hunger to secure an offer, startups are often guilty of taking the first one on the table – often out of fear that they won’t get anther one. But this is a huge mistake.
Even in the haste of it all, it’s essential to “shop around” and ensure you have a number of offers to choose from. Each offer will naturally have their pros and cons.
When we were scaling our business, we weighed up no less than 10 offers before picking one. The one we chose allowed us to run the business exactly in the way we wanted, and gave us longevity.
The others ticked some big boxes at the time (and would have been easy to accept if we hadn’t been patient), but in the end they weren’t right for us.
Have confidence in your business, sell the dream in the right way, and offers will come. Once they do, be sure to capitalise without jumping in too quickly.
Not being clear on what the money is for
I touched on this earlier, but it’s worth exploring in more detail. What do you actually want the money for? Are you expanding your premises nationally, or maybe internationally?
Perhaps you are on a recruitment drive, or developing a new product in-house.
Whatever your needs, be sure to explain these clearly in your loan application to avoid the common mistake of “money for money’s sake”.
Why borrow £5m now if you actually only need £1m to meet your immediate objectives?
Many startups make the mistake of asking for more than they need, despite it being universally known that banks use a variety of formulas to work out how much they think you can afford to borrow.
One way of helping a potential lender understand your business needs is to develop a relationship with them before you actually need finance. That way, they’re already on board with your vision, and the conversation further down the line will naturally be a much easier one.
Immediate priorities aside, it’s also a good idea to build a contingency into the amount of working capital you budget for when applying for a loan – there are always things that come up, which even the sturdiest business plan cannot anticipate.
Assuming banks are the only funding source
Some entrepreneurs assume that the only feasible option is to apply for a bank loan, largely because they’re the most conventional and widely advertised. But this isn’t the case. In fact, it’s far from it.
There are many funding solutions offered in the alternative lending marketplace – an area that has experienced significant growth of late and become increasingly popular with the startup community.
The majority of alternative finance lenders are fine with borrowers who have impaired or bad credit, or have a limited business history, making them well suited for young businesses.
Again, there is a wider point here around doing your research to find the best deal. Don’t simply go down the mainstream route because it’s the most accessible.
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CityAM
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