Most people could be forgiven for thinking that small businesses can just go to a bank with an idea, and the bank will loan them money. There’s more to the story. Most, if not all banks today look at the creditworthiness of the small business owner, and in essence the small business owner is on the hook for the loan personally. At first blush this seems like a good idea, you want the people who are running the business to be responsible. If this was the only problem with small business lending, it would be bad enough.There is a much bigger problem. Once a small business owner derives all of their income from the small business, their personal guarantee is only as good as the small business, but banks typically don’t look at the health or viability of the business in assessing the risk of loaning a business money. In addition, banks typically are looking for two years of business operations, so that precludes startups from obtaining a loan.
So, where do small businesses startups go for initial funding? First, founder’s funds. Followed frequently by friends and family. It is a shallow pool of resources, and it helps to explain why so many small businesses fail. Oh, sure, there are many other reasons businesses fail, but if all the other factors are sound, the lack of access to the tools of capital formation will keep a viable business from growing, and without growth, businesses eventually die–just like a plant that stops growing will eventually die.
In upcoming posts we will examine in more detail the options that are currently available. Given that the byline for my blog is Changing the World of Small Business Finance, you would be correct in concluding I’m going somewhere with all of this. I’m hoping you’ll join me in this journey, and that together, we’ll make a huge difference for a growing number of small businesses that join our family.