Finding finance for running a business is one of the top most challenging situations entrepreneurs encounter. For some businesses, lack of capital will stunt their growth into a bigger company with a greater reach. For others, their very existence is threatened by the lack of cash.
The process of finding a financier is complex and many small business owners are unaware of the perils of being unprepared to face inquisitive questions about their businesses. There are certain times when you do not get a second chance and one of these is pitching your business idea in front of a potential lender or investor.
Speaking of lenders and investors, many home-based business owners do not have a clear idea in what form they want to obtain financing for their enterprise: as equity (money in exchange for interest in the company) or debt (a loan to be repaid). These are important considerations which will ultimately determine whether you get the cash influx and whether you will be able to fulfill your undertakings.
Today we will discuss the most frequent mistakes which you may make in seeking out financing for your business, like many other small business owners. Avoiding them will significantly improve your chances of getting financing for your home-based business.
1. Asking for Too Little Capital
One of the biggest mistakes small business owners make is estimating their capital needs based on the best case scenario for their business. This way of thinking also stems from the (false) idea that asking for a smaller amount of money will make you more likely to obtain it.
In reality, when you determine your financing needs, you should think of the worst case scenario and the amount of money your business would need to survive it. Otherwise, when such a scenario happens, you will be left short of cash, with limited possibility to raise more and unable to repay your initial lenders or investors.
2. Not Thinking about Your Business Like an Investor
Yes, you are passionate about your business idea. This is a good thing, it is one of basic prerequisites for being successful. However, when you prepare your pitch for a potential financier, you should detach yourself from your feelings and examine your business with a critical eye. Find its strong points and weak points, and include all of them in your presentation.
It does not mean that you should not express enthusiasm for working on your business, but do not make it the key argument in your executive summary. Take into consideration an investor’s fears, needs of assurance, and thought processes in deciding to go ahead and give you their money.
3. Showing up at the Meeting without a Clear Business Plan
A business plan is not a list of ideas you wrote down during the car ride to the meeting with a potential investor. A business plan is your proof of maturity as an entrepreneur. You must demonstrate that you know the market and economic conditions, the dynamics of the niche you operate in, who your potential customers are, what needs or problems your product/service solves, and how you estimate the cash flows of your business in the upcoming years.
The more detailed and realistic your business plan, the higher your chances are to obtain the financing you need.
4. Not Exploring All the Potential Financing Options
As a start-up, and a home-based business, your chances of attracting the interest of an angel investor or obtaining a business loan from a bank are small. However, apart from these traditional capital-raising solutions, there are now other options to look into. One of these is joining small business owners unions and organizations which facilitate obtaining financing. Another is seeking crowdfunding.
Without a little creativity in considering who may invest in your product or business idea, you may miss out on a great opportunity to raise the money you need to grow your business.
5. Not Running a Business Model with Short-Term Revenues
If your business model needs a constant cash influx for months, even years, before it starts generating revenues, then you are certainly not going to find a financing institution or investor willing to block their money in a business which takes a lot of time to take off – if it ever does.
The current economy favors business ideas which are capable of generating cash quickly, within a couple of months from starting its operations. This consideration is not critical just for raising capital, but also for protecting your personal finances from unrecoverable losses.