Starting a Business & Obtaining Financing
Nine Commonly Asked Questions
I know that I
have a successful business idea. All I need is money.
Why does all this have to be so complicated?
You may "know" that you have a
successful idea, but that is not sufficient. If you wish
to obtain financing, you have to demonstrate, in
writing, to other people that your idea will be
successful. Their money, after all, will be at risk;
they cannot lend money based on your opinion. If "they"
is a bank, the money that they are lending you is
actually money, which belongs to their depositors, and
they are naturally cautious. Many small businesses fail
they want to be sure that you are one that succeeds!
You may believe that your issue is
"money" many people do. However, the real business
issues (that may prevent you from receiving a loan) are
more likely to be your market, management skills,
distribution network, pricing, or operating budget. For
many people, money is an obstacle that ignores more
What skills and
experience do I need to run a business?
The skill and experience requirements of
a business vary widely, but in general they include
Attitude: A strong need to achieve, drive, abundant
energy, the courage to take risks, persistence,
self-confidence, flexibility, innovativeness, ability to
get along with others, and Skills: Educational skills
(reading, writing, arithmetic), professional or
technical skills (specific experience in the line of
business), entrepreneurial skills (past management
experience or ownership of a business), and management
skills (leading, organization, prioritizing).
Many lenders consider past experience in
the line of business as crucial to your potential
success. If you seek financing, be prepared to explain
how your work history will contribute to your success as
a business owner.
Who is my
A successful business has at least four
important partners: an accountant, a banker, a lawyer,
and an insurance agent. Each of these people has
specialized skills that can help a business succeed.
Why do small
Some studies have suggested that many
small businesses fail within the first three years.
Causes vary, but the primary reasons can usually be
traced to lack of business planning, insufficient
management skill, inadequate experience, and lack of
You can significantly increase the odds
that you will be one that succeeds by going through a
feasibility analysis process which forces you to examine
many possible business start-up issues and questions.
This is called writing a business plan which can range
from a general sketch of your business and key business
issues to a comprehensive analysis and description of
the business and its operating environment.
Where can I
learn more about running a business, and about my
business in particular?
There are many basic business courses
offered by the Massachusetts Small Business Development
Center, along with free business management counseling
and business management training videos. Also, your
local library will have books and periodicals on
business and possibly some business training videos. The
appropriate trade association and small business owners
in the same industry can be invaluable sources of
information concerning your specific type of business or
To see a statewide listing of workshops
offered by the MSBDC, visit our website at
What do I have
to prove to a bank or investor in order to get
In general, you have to demonstrate that
there is a market for your product or service that you
have sufficient management skill to start and manage the
business, and that there is sufficient cash flow from
the business to repay the loan (shown by a projected
What must I do
to answer the questions that lenders will have of me?
The accepted practice is to develop a
financing proposal that includes several parts of your
business plan. At a minimum, the proposal should include
a brief description of your planned business, a summary
of the requested loan (use of funds, requested terms),
management resumes, a personal financial statement, and
a projected income statement for the first year
(including an explanation and justification of income
and expense items).
What is equity?
Equity is the money and/or assets, which
you put into the business yourself. Banks rarely lend
100% of the funds required by a business, just as a bank
rarely makes a mortgage for 100% of the value of a
house. It is expected that you will put a part of the
funds required into the business yourself. This shows
that you are willing to risk your money in the business.
Collateral are the assets you pledge as
security on a loan. These assets may be a part of the
business, or they may be personal in nature (equity in
your house, for example.)
One of the key issues that a lender is
concerned with is "How will I get repaid?" There are two
potential sources of repayment, in general: cash flow
from the successful business and the proceeds from the
sale of your collateral should the business fail.
Lenders usually prefer that the resale value of
collateral be greater than the loan request.
The Massachusetts Small Business
Development Center Network provides free and
confidential business assistance to those wishing to
start a new business venture or who are operating an
existing small business. Additionally, we provide many
business management training courses. The MSBDC is here
To receive services, please call our
office at 978-542-6343 or complete a
request for information form.