Monday, June 18, 2012

Top 3 Reasons Why New Entrepreneurs Should Not Pursue Bank Loans

beginning entrepreneurs fundingWhy would a beginning entrepreneur want to avoid banks? After all, won't you need a bank to secure much needed credit lines and other forms of funding? Does not conventional wisdom say your banker should be one of your closest advisors along with your attorney and your accountant? In reality new entrepreneurs get most of their early capital from personal savings, personal credit cards, friends and family, and cash flow from the business. Banks typically come into play much further down the road, but not for lack of trying. New entrepreneurs should not waste their precious time on banks. Even if getting a bank loan were possible at this stage, it should still be avoided. Following are the top three reasons why new entrepreneurs should not pursue bank at all.

1. Terrible Odds

Having secured business financing from banks in the past I can tell you it is extremely time consuming, and unless you can show 2 to 3 years of positive cash flow, it is very unlikely you will get a loan from any bank. The amount of information they request is just plain ridiculous, and just when you think you handed over everything, they request even more information. Weeks later you get the dreaded no. It ends up being a huge waste of time. In the event you are "lucky" enough to get a loan, the bank will require significant collateral in the way of receivables and / or your personal property. 

2. Over Confidence

One of the greatest assets for new entrepreneurs is their confidence and optimism. The positive energy is contagious and goes a long way in helping generate buzz around their product or service. But when it comes to finances, this optimism is their worst enemy. Because they are so confident in their future success, beginning entrepreneurs will agree to just about any terms. Unfortunately, for most entrepreneurs success will not come so quickly or easily. The over confident entrepreneur thinks, No problem. We're going to hit big anyway.

3. Lack of Experience

New entrepreneurs simply do not have the experience to sit across the table from a seasoned loan officer who eats new entrepreneurs for lunch. The problem with new entrepreneurs is they are in too much of a hurry to get their hands on the money. Because of this haste, they will not force multiple banks to compete for their business. The entrepreneur is the customer and is doing the bank a favor by letting them in on a great opportunity. Only seasoned entrepreneurs take this attitude. Unfortunately, for most beginning entreprneurs at this stage, they have a state of mind more like, Wow I can't believe they are giving me money! I better take it before they change their mind! 

If you don't trust my words, then trust those of Howard Shultz, the CEO of Starbucks. Here's what he says in his book "Pour Your Heart Into It", a book I highly recommend for all entrepreneurs:

"Another important thing I learned during that difficult time was that taking on debt is not the best way to fund a company. Many entrepreneurs prefer borrowing money from banks because doing so allows them to keep control in their own hands. They fear that raising equity by selling shares will mean a loss of personal control over the operation. I believe that the best way for an entrepreneur to maintain control is by performing well and pleasing shareholders, even if his or her stake is below 50 percent. That risk is far preferable to the danger of heavy debt, which can limit the possibilities for future growth and innovation."

If you are a beginning entrepreneur your focus and energy should be on getting your product or service in front of your target market. Seeking bank funding eats up precious time with very little pay off. In a previous article I discussed the top sources of funding for new entrepreneurs. If you need funds, it is best you start there. The odds are far greater than dealing with banks.

Godspeed and I look forward to seeing you in the Players Lounge.

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