The failure rate for businesses has dropped by more than 30% since 1977, according to a report from Case Western. That’s good news, but more than 50% of all new businesses still fail within their first year, and by 10 years, more than 96% will have failed.
The fact remains: Starting a company is hard. Really hard. Most people with an idea do nothing more than talk about it, and even entrepreneurs who pursue their passion usually fail.
Businesses almost always fail for the same reason: They run out of money.
Day jobs are easy. If you have one, you might want to think twice before leaving to start your own business. But if you do leave, make sure you have more than enough money to finance your family and your business. The general rule of homebuilding also applies to company building: Make a budget, double it, then double it again — that is roughly half the amount you need.
The vast majority of business owners started their companies because they loved their industry and believed they could provide a great product or service. Passion is important and sexy, but boring financing is equally important. Businesses need working capital to grow and to cover cash flow fluctuations. The problem is most entrepreneurs I know hate raising money. It can be frustrating, and the consequences of making a wrong choice are severe.
It doesn’t have to be this way. Here are a few things I’ve learned as an entrepreneur and investor that can help you find the right financial partner to get the capital you need:
1. Make sure you are all in.
Your best financial partner is staring at you every time you brush your teeth in the morning. I have received a lot of push back on this, but I still firmly believe you shouldn’t take a penny of someone else’s money until you have put every penny you can afford into your business. Building a new company should be about putting in absolutely everything. And by that, I mean not just blood, sweat and tears. I mean your own money, to the point you are (moderately) uncomfortable. Personal loans, personal credit cards and home equity loans also fall into this category, and sometimes these come with surprisingly low interest, which makes them smart financial decisions regardless of whether you can get a traditional business loan. Some would say to never leverage yourself in this way, but smart entrepreneurs have found great rates and terms that make good economic sense. But beware: Introductory rates, for example, are great, so long as you refinance them before the rate expires.
2. Raise money from the people who make you most afraid to lose it.
The latest Private Capital Access report, a joint project between Pepperdine University and Dun & Bradstreet, showed the most successful type of financing comes from friends and family. Some say that borrowing from friends and family is unwise, but again, I disagree. I always tell entrepreneurs that after putting in everything you have, you should go to your mom and dad, then your grandmother, then your friends. If your kids have a piggy bank, consider an investment in their future. Then take a deep breath and feel that weight on your shoulders. For me, there is nothing more frightening than losing my mom’s money. If her money is in my business, everyone else’s will be much safer.
3. Think inside the bank.
The Private Capital report showed the most common source of business credit is still a traditional bank. Banks are a common source of capital but a really difficult one: The overall success rate to get a bank loan was only 39% in the first quarter of 2017. This means the majority of companies that seek a bank loan don’t receive them. If your company has the type of history and balance sheet that is attractive to banks, by all means take advantage. But not all business loans are the same, so make sure you don’t have a personal guarantee or your “business loan” will be nothing more than a personal loan in disguise.
4. Think outside the bank.
There are great alternatives to bank financing, some of which might surprise you. Community Development Financial Institutions (CDFIs) and other community lenders have many attractive options, especially for women and minorities. Online lenders can provide a fast, convenient option for early loans, although there may be a steep price for that convenience, so choose carefully. Crowdfunding is another alternative source. Appealing directly to potential customers for financing has made several upstarts wildly successful, and tens of thousands more have reached more moderate goals. Yet 61% of business owners surveyed in the Private Capital report say they don’t understand how alternative financing works. If you have a company that needs capital, make it your business to learn more.
5. Venture into venture.
Many entrepreneurs think that attaining venture capital is the ultimate goal of a start-up. It can be a great source of capital for some, especially high-flying technology companies. But be warned and wary: Venture is hard to come by and is expensive. Raising venture capital also requires an eventual sale. If you try the venture route, plan for at least a nine-month process, and seek introductions to as many VCs as possible. The most important thing to remember is that you’re looking for a partner, not just a loan. Venture capital is expensive capital, but what makes it worthwhile is to partner with other brilliant minds who can help you avoid entrepreneurial pitfalls.
Securing financing is an overwhelming task that drowns most entrepreneurs. But it’s an area where just a little research and education can be the difference between sinking and swimming.
Jeff Stibel is vice chairman of Dun & Bradstreet and a partner of Bryant Stibel. He is the USA TODAY bestselling author of Breakpoint and Wired for Thought. Follow him on Twitter at @stibel.
Jeff Stibel is the Vice Chairman of Dun & Bradstreet and a Partner of Bryant Stibel. He is the USA Today bestselling author of Breakpoint and Wired for Thought. (Photo: Bryant Stibel)