AdvisorSmith recently spoke with Department of Management Professor Tim Michaelis on funding for start-up business owners. Their September 9, 2021 Q&A has been reposted below. Michaelis is one of three entrepreneurship faculty members who will share their expertise on innovation during the college’s September 15th online panel discussion “Empathy, Creativity, and Innovation.” (To register for the event, visit: go.niu.edu/wnw .)
Q.What are the best sources of financing for startup businesses?
Tim: There are many ways to finance a new business. One of the best ways is by using your customers’ cash up front or through re-invested revenue. There is a great book that details these methods and business models, titled, The Customer Funded Business by John Mullins.
Other alternatives for funding aside from traditional bank loans are via personal savings accounts, asking family and friends, debt-based or rewards-based crowdfunding, government grants like the Small Business Innovation Research program, pitch competitions for nominal funding, joining an business accelerator to get access to local area angel networks or angel funds, and, for more established companies (with growing revenue), venture capital or private equity firms. Databases like Pitchbook, Crunchbase, and PrivCo can provide some contact information for these groups stratified by location.
Q.How can startup businesses increase their chances for getting approval on a loan?
Tim: One thing that many people should do is to sign up for a business credit card earlier in life to establish a business credit profile. This is important because personal and business credit are two different profile or reports on an individual’s creditworthiness.
Nobody needs to launch a large company to get a business credit card. Oftentimes, people don’t realize they already have a side hustle that qualifies as a business, e.g., selling on eBay or Amazon, pet sitting, baking, crocheting animals, handyman projects, landscaping, consulting, or moonlighting from your traditional job, and really anything where you provide a product or service to someone in exchange for money. Having established credit before starting your dream company can help get you approved for larger credit lines with banks.
Q.Do you have any tips for startups looking to receive first-time business loans?
Tim: Those who are starting a company need to develop a clear value proposition that details the market demand and price for their business’s products or services over the next 24 months. Providing a sales forecast in simple terms is step one.
Next, highlighting market demand and explaining why you and your team are uniquely able to deliver your solution to customers is something that all investors require before funding your business. All seasoned entrepreneurs understand that people invest in people, so it is critical that you can articulate why you are motivated to make your business successful, the strategic partners who are willing to help you, and gathering statements from different stakeholders (e.g., vendors, customers, etc.) on their willingness to help you or buy your business’s products will go a long way in improving the odds of receiving funding.
It is important to recognize that receiving funding takes time, typically at least six months of talking with an investor before they are willing to provide funding. It is a lot of work to develop and manage a social network for one’s business, which is why the most common way for all startups is to self-fund their business.
I recommend startups have very concise one-page statements for each aspect of their business model completed and saved via a cloud database (e.g., Dropbox, Google Docs, etc.) because you never know when you will find the right investor, so having well-articulated plans at a moment’s notice will help if the goal is funding aside from traditional options like bank loans.
~ reposted by M. De Jean, Director of Marketing, NIU College of Business
