You are ready to start a business but are you start-up business ready? Start-up business readiness involves reviewing your product or offering, your marketing plan, your finances and your personal readiness and attitude. Becoming an entrepreneur is a major undertaking. Entrepreneurs will put in a lot of time, a lot of energy, a lot of effort and A LOT of money! You want to be sure you have done extensive research on your offering and demand for your product. Of course, you cannot research your business idea indefinitely or you will never get your business off the ground.
Statistics say that every year, almost 90% of start-up businesses fail – 90%! Franchised businesses tend to have a lower failure rate because of the more successful franchise system that is in place. Mom and pop type businesses tend to have a higher rate of failure because of the lack of following a proven system. The same statistics that say 90% of start-ups fail also say that fewer than 50% of businesses last 5 years. This information is not meant to be discouraging in any way! This information is supposed to help you plan better. I love American ingenuity and the American spirit! There was a restaurant near my home in Florida, that was 5 different independent brands over a 5 – year period. That is right, 5 years, 5 different restaurants. Each restaurant would last a year or less, however, it was a great location, on a busy street and off a major highway. It was always leased within 3 months of the previous restaurant closing. I would always think to myself “you cannot stop the American people. American’s will always try again and will always have hope!”
Businesses fail for several different reasons however the main reason is a lack of business funding. Approximately 80% of businesses that fail cite a lot of funds to keep the business open. Business owners often severely underestimate the amount of capital needed to keep the business afloat until they reach profitability. Many people have an unattainable timeline for reaching profitability as well. You must have realistic goals when starting a business and you must have enough capital available to them to weather the tough times. Most of the business articles you see today talk about either “bootstrapping” your start-up by using your own funds or getting funds from family members or they talk about Venture Capital. Venture Capital is great but is primarily directed at tech start-up businesses or businesses that show sustainable growth and scalability. Venture Capital is not the answer for most start-up businesses. So, what type of financing do start-up businesses need? Start-ups will typically look at SBA Funding, 401k Business Financing, Unsecured Bank Loan Funding and Loans/gifts from family and friends. Each type of funding can be helpful to a start-up business owner and the entrepreneur should evaluate each option carefully.
SBA Loan – The SBA or Small Business Administration does not lend money to businesses. The SBA makes the guidelines for business loans to entrepreneurs and then guarantees a portion of the loans issued to businesses by SBA approved banks and non-bank lenders. This allows the banks to lend the funds to start-up businesses without the lending institution taking on all of the risk. SBA loans typically require collateral for the full amount of the loan and if the businesses assets do not fully collateralize the loan, the SBA may request personal assets, like your residence or rental property. SBA loans can be very helpful for a start-up business because they are typically 10 – year terms when no real estate is being purchased and 25 – year terms, when a real estate purchase is included with the business. There are different types of SBA loans including 504, 7a, Business Debt Consolidation and the Working Capital loan.
401k Business Financing – 401K Business Financing, which is also known as a ROBS – 401K Rollover for Business Startups, allows you to rollover funds from a 401K from a previous employer into a corporation for use to start your business. You can rollover these funds without fees and penalties by setting up a corporation. The 401K rollover plan will then use the rollover assets to purchase the stock of the new corporation. Utilizing the rollover is not a loan and does not need to be paid back and you do not incur the penalties as you would with a simple withdrawal from your current employer 401k. You will need to establish a corporation that is a separate entity from you. This is done through a handful of companies that assist with this specific type of rollover. The company will create a C-Corp that is self-directed with you as leader/director of the entity. You will use the funds to purchase the business of your choice without needed a loan! These companies will also set up a solo K program to allow you to begin to contribute to a 401k plan again.
Unsecured Bank Loan Financing – The Unsecured Bank Loan program provides prospective business owners with a way to obtain funds to start or expand their businesses, without the collateral and financial documentation required by an SBA loan. The Unsecured Bank Loan program looks at your individual credit, income and debt-to-income ratio to determine an approval amount. These programs are marketed as providing up to $150,000 in unsecured bank loans and up to $250,000 for highly qualified clients with high income and lower credit usage. These programs offer 5 Year Terms with Fixed Interest Rates, No Collateral, No Prepayment Penalties and an Unrestricted Use of Funds. Many choose to use the Unsecured Bank Loan program to finance businesses that may not be approved by the SBA. Prospective business owners may not want to pledge personal collateral that may be required by an SBA loan.
Of course, other prospective business owners may choose to rely on personal savings or loans and gifts from family members to fund their business. Additionally, some start-up owners will look for Angel Investors who will typically want a large equity stake in the business. Others will turn to crowdfunding platforms to pitch their idea to multiple investors who may each contribute small amounts help to fund the venture and will be paid back once the business either begins making money or becomes profitable.
You can be Start-Up Business Ready by being prepared and having a financial plan for economic downturns or even nationwide pandemics. Business owners need to be sure they have several months of cash in reserves to weather the storms that almost all businesses face.
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