Category Archives: Credit

Financial Issues in Business Startup

The prospective new business owner approaching a lending institution should keep in mind the “five c’s of credit:” character, cash flow, capital, collateral, and (economic) conditions. Character consists of the borrower’s integrity, experience, and ability; particularly close attention is paid to a borrower’s credit history, which is a matter of record. Should you decide to try to fund a startup through a commercial lender, the remaining criteria are addressed in the loan request.

A primary inhibitor of business start-up is that few people have the financial cushion to give up a job for the uncertain income of a start-up venture. In a recent survey, about 30% of new business founders identified inadequate funding as their biggest hurdle, and a similar amount said lenders were too conservative. About 15% reported being unable to find investors, and a similar amount claimed a lack of collateral.

The prospective new business owner approaching a lending institution should keep in mind the “five c’s of credit“: character, cash flow, capital, collateral, and (economic) conditions. Character consists of the borrower’s integrity, experience, and ability; particularly close attention is paid to a borrower’s credit history, which is a matter of record. Should you decide to try to fund a startup through a commercial lender, the remaining criteria are addressed in the loan request.

The loan request should include a credit application, financial information such as tax returns and personal financial statements, and a brief business plan emphasizing projected financial performance of the new venture. The plan should demonstrate how the business will generate sufficient cash flow to repay the loan, specify collateral, and show the borrower’s personal investment.

In addition to servicing the loan, cash flow should also cover operating expenses, and provide for some re-investment for the increasing financial demands of a start-up venture. As collateral, banks will often lend up to 80% of the market value of real estate, and up to 50% on business assets such as equipment, inventory, and current accounts receivable. Lenders and investors often require that the bulk of start-up monies be provided by the business owner. This assures these stakeholders that the owner is committed, and has confidence in the financial projections.

When the entrepreneur can not meet the requirements of commercial lenders, and does not have a favorable arrangement with partners or other investors, the remaining options are difficult and expensive. These options include public-sector guarantees, finance companies, and the venture capital market.

Even where the start-up investment consists largely of other people’s money, the amount of financial risk for the entrepreneur is beyond what most can responsibly handle. For many with the financial means, the stress of bearing complete responsibility for the company’s direction and performance is the discouraging factor.

Once the venture is off the ground, a new set of challenges faces the entrepreneur. A recent survey showed their major concerns, named by more than half of respondents, were: “getting new business/clients”; “managing my time”; and, “promoting my business”. Another interesting question was what they missed about the corporate world. The top three responses were “company-paid health insurance”, “a regular paycheck”, and “retirement plans”.

Various estimates have been made for the failure rate of business start-ups, based on various concepts of failure and of appropriate survey methods. The consensus seems to be that less than half of new businesses survive the start-up “trauma”.

Perhaps, a major reason for what seems to be a high failure rate is that it is so easy to start a business. There is no institutionalized check of qualifications in the U.S.; on the contrary, our tax dollars fund the Small Business Administration and other agencies and programs that encourage business formation.

Another survey showed that over 80% of entrepreneurs would take a pay cut if that is what it took to keep the business going. Just over a third would sell the business, even if a good price were offered.

John B. Vinturella, Ph.D. has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site www.jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business”, available on Amazon.