Tuesday, May 6, 2014

Financing Your Startup: Conversations with Business Bankers

For most startups, you need to have money in the bank to withdraw it for your business.
I remember when my younger brother was five years old and he asked me to buy him a Sega Genesis console and games. I told him I needed some money to do that. He told me to go to the ATM and get some because the bank had lots of money! While that's true, it needs to be in your account to gain access to it!

In this blog post I share a couple of conversations with business bankers that focus on serving small businesses. They illustrate the difficulty you run into obtaining business loans for financing your start-up.

How to Finance Your Start-Up Business

Here's a video of a brief conversation with a vice president of small business accounts at Bank of America. In this video the business banker provides you with a rundown of the traditional sources of start-up capital for businesses in all industries. Sound familiar? Probably. But he's right.

A bank provides loans at such (relatively) low interest rates because the bank mitigates its risks by focusing on companies with consistent, sufficient operational cash flow and net income. Start-ups in the very early stages very rarely have either. For the rare startup that is profitable out of the gate, the company still does not have the operating history a bank typically looks for. Minimal operating history means your company's current performance could be a fluke.

Small Business Startup Funding Sources

Here's one more interview with yet another Bank of America business banker focused on the small business market, Mark Hogan. (Actually, Mark Hogan is the President of Small Businesses at Bank of America!) Mark gives a wider range of options and puts them into three different categories.

The three "buckets" the financing is grouped in is as follows:
  1.  Personal capital
    1. This category does not just include funds in your personal bank or savings account. This category also includes the monies lent to you or invested in your firm through your personal relationships - family and friends - who believe in you and your idea or company.
  2. Consumer finance
    1. This category includes personal credit cards, second mortgages and other loans using your personal credit that you take out to fund your business.
  3. Business credit
    1. This category includes business loans which, for start-ups, may initially be backed by your personal guarantee or the personal guarantee of a family member or investor. This category also includes business credit cards which may also initially be backed by a personal guarantee. As the company ages and develops a track record and verifiable financial history, the personal guarantees will go away.
Want to know more about non-traditional sources of start-up capital and how to obtain start-up funding from smaller banks focused on small businesses?


1 comment:

Jen said...

Thanks for sharing the videos. Some good insights from people in the know!

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