It happens all the time. A business owner neglects their financial projections before they start a business, they think they have plenty of savings to get the business started, but after spending every last dollar from their savings account, they need a bit more and they apply for a business loan.
The Result?
They will undoubtedly be Denied.
Wise entrepreneurs will leverage their cash to secure a business loan long before they need it. Banks are not in the business of handing over a pile of cash to individuals who have no cash, or assets to pledge as collateral, but if you have cash on hand there are plenty of lenders who would be willing to provide at least a small loan.
Typically the experts say that it will take you twice as long and twice as much money as you expected to start your business. We have been collecting some interesting data here at ProjectionHub and noticed that only 16% of startup business owners are taking a paycheck from the business in the first year. This means that you not only need to worry about the expenses of the business, you need to consider your personal expenses as well during the first 2 critical years.
Receivables are Not the Same as Cash
Here is the typical situation that I have observed. Business owners will invest cash reserves into their business in order to generate sales, they get the sale, but then they have to fulfill the sale. They hire people, complete the service and then bill the client. Here is the problem, you have to pay your employees, your suppliers, your rent, your utilities, etc, etc, but your client might not pay you for 60+ days. Many first time entrepreneurs are not expecting or planning for this situation, so they start the business under-capitalized.
It is a death sentence.
You might think that you will be able to get a loan based on your receivables right? Your customer owes you $50,000, someone should be willing to provide at least $45,000 now based on those receivables, so that you can pay your employees and suppliers right? The problem is that lenders typically look negatively upon business owners that let themselves get into this situation in the first place. They think you should have done a better job at planning, and secured the funds before you spent every last penny.
You simply must secure a loan or investment before you use your savings.
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