ENT 650

Debt Financing: Blog 7 – ENT 650

Majority of start-ups use bootstrapping and debt financing to source their funding this is through personal savings, family and friends, angels, foundations, government, banks, and credit cards. Sometimes start-up loans through the bank are harder to acquire. “The primary reason for this is that banks and other institutional debt providers do not supply start-up capital because it is too risky. Start-ups have no history of cash flow that can be used to repay the debt obligation.” For this same reason I feel that it would be very difficult to get funding through investors or otherwise because you have to show a history of positive cash flow, but how can you show that when you are just starting up? This is why I feel that debt financing through bootstrapping is the most successful way to get funding. Most entrepreneurs feel this way as well, since 90% start out through bootstrapping. Pros for financing through debt include being able to retain complete ownership and not having to worry about investors, capital cost being low, loan payments are the same every month, you can get a loan where you have 3, 5, or 7 years to pay it back, you can use value-added lenders, and tax reduction benefits. All reasons why I have also chosen this route. I am debt financing through a loan and personal savings as well as help from family.

Women owned companies still battle with lower loan approval rates, they have shown to be 15%-20% lower than male-owned businesses. While credit scores were lower for women owned businesses. Studies have shown that women are more fearful of their loan being rejected than men are and so they don’t even submit their loan applications. So women-owned businesses use their own personal credit mostly. It is also proven that women owned businesses stay in business longer and repay their loans. Some banks go with the strategy of supporting women through loans, these specific banks include: Wells Fargo, KeyBank, and Citi, these banks have proven successful through their loans to women.

Community banks are more likely to customize loans and work with the entrepreneur to fit their needs. Small banks will get to know you and your business and be more willing to help you succeed where larger banks will just want to see the numbers. Then there are Community Development Financial Institutions that will work with you if you don’t met the standards that banks will work with you. “CDFIs can make riskier loans because they are not restricted by FDIC regulations in the same way as depository institutions are.” Go to www.cdfifund.gov to find a CDFI near you.

It’s amazing how many great companies out there starting out through bootstrapping and debt financing. It gives me hope that it is possible to start with nothing and turn it into something. Some of these inspiring companies include, Domino’s Pizza, Hallmark Cards, Black & Decker, and Gallo wine. I really admire those and love hearing stories of how big companies started and how they didn’t have anything but their idea to move them forward.

 

Resources:

Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York: McGraw-Hill Education.

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