An entrepreneur had an idea for collecting and selling internet data. A partner at a venture capital firm heard of the idea and asked him to come in to pitch it. The entrepreneur asked for $1 million to create and build the business, and by the end of the meeting he had a deal for $5 million. The only change to the business plan was he had to build the business faster.
True story. And, like similar stories in the late 1990’s, when money grew on trees, this entrepreneur went on to build and grow the business, only to see it blown to smithereens when the dot com bubble burst.
Times have changed. “In 2009, 558,000 new businesses were created each month,” according to the Kauffman Foundation. During that year (the whole year), Venture Capital firms invested in roughly 3000 firms, and Angel Investors provided seed money to about 50,000 firms. Private equity firms have “exploded” this year and 2,600 firms have already invested in 15,300 new companies. Let’s do the math. If roughly 500,000 new businesses were created each month, that’s about 6,000,000 in a year. And under 80,000 of them are funded by private equity, angel investors, or VCs. HOW do the rest of the the entrepreneurs fund their businesses?
An entrepreneur takes money out of a savings account. And the 401K account. An entrepreneur takes out equity from his or her home. An entrepreneur borrows money from a parent or other family members. An entrepreneur takes out a small business loan backed by the SBA, by putting the house and car up for collateral. And, an entrepreneur completes grant applications and is awarded one or more to fund a business. One of the entrepreneurs I interviewed has done all of the above! And, he is still looking for creative ways to ensure his cash flow is healthy. Cash flow, after all, is the bottom line.
Bank loans are still hard to get. A universal plea from entrepreneurs we’ve interviewed is to get a bank loan or line of credit when you don’t need one. If you do need one, they probably won’t give it to you. The best approach to getting a bank loan is to network with bankers and develop a relationship with one or more. One entrepreneur met a banker in a business class while he was in graduate school. He kept up with the banker, and about three years later, went to him to apply for a loan. The relationship worked – the banker was a mentor.
Another entrepreneur who does residential construction has been in business well over 20 years. He has worked with the same banker throughout. He now calls the banker and gets verbal approval for the funds over the phone. That’s because he has a track record – paying back all loans with interest.
The best banks to go to for a loan are the small ones. Why? Quite simply, the bottom 7215 banks make 63% of all small business loans. Bankers are known to help entrepreneurs find the right bank for their loans when the loan isn’t ‘big enough.’
All the best!