Especially during tough economic times, many small business entrepreneurs find it hard to raise the capital they need. Banks reject their loan applications, and they can’t get investors to say “yes” to their proposals. However, many of the rejections are a result of the mistakes made when seeking financing.
Here are common mistakes you need to avoid when looking for startup financing for your business:
Not realizing that the process is not easy.
Raising capital for a startup is both long and hard, and many startup entrepreneurs underestimate the process.
No borrower risk
Asking a lender for 100% of the capital requirements is a major red flag to investors. Investors want to see that you are committed to your business.
Less-than-solid business plan:
Investors want to see that you’ve developed a vision for your company and that you’ve given thought to the details of how to get there. They want to see things such as financial projections, detailed marketing plans, and specifics about your market — which should all be in your business plan. They also want to see your exit strategy, so they can see how they can reap the return on their investment.
Running out of money:
It’s the irony: when you run out of cash while trying to raise money. Make sure you don’t underestimate the financing process and have the cash needed to run the business while raising more money. Have at least 6 months of cash on hand.
Poor working capital projections:
instead of focusing on assets to be acquired, make sure your plan has realistic cash flow projection
Not connecting with the investor
Investors want to know that you need them and that they are a good fit for you, your vision and your business. Make them believe how much you need them. Show them that you trust them, especially since fundraising is all about building trust.
No real marketing plan:
Financiers want you to be able to clearly articulate what you’re going to do and why it is supposed to work along with the related costs. They also want to see that you understand the market and the level of competition you have. Not understanding the competition is a red flag for most investors.
Investors hate businesses with an overinflated sense of value. They also hate it when the entrepreneur tries to trick them with numbers, gaming the metrics to make it seem the business is bigger or lots more potential than it really has. Tell it to the investor straight. Your plan needs to be rational with well-documented assumptions. And if you strongly believe in your valuation, you need to be able to defend it to potential investors.
No expertise and support team:
Financiers want to see that you have the knowledge, expertise, and support to make the business successful — and that includes the ability to find the right team to make the startup work. Most investors will only write checks to those who can build a solid management team. Some investors will even say that having no solid team is a huge deal-breaker for them.
You need to be prepared to impress the heck out of the lender — in less than 5 minutes flat! Investors make a go/no go decision in 5 minutes so be sure to keep your presentation very succinct.
- Article: 7 Small Business Start Up Money Seeking Mistakes
- Article: Worst Startup Fundraising Mistakes
- Book: Small Business Financing: How and Where to Get It (Business Owner’s Toolkit series)
- Book: Financing New Ventures: An Entrepreneur’s Guide to Business Angel Investment (Andrew Zacharakis) (Babson College Entrepreneurship Research Conference Collection)
Originally published on October 27, 2010. Updated on February 7, 2020