Lack of capital major causes of business failure

Lack of capital and inadequate record-keeping are major causes of business failure.

By: Hitesh Khan/

Sound entrepreneurs must know not only how much money they need to start the project but also how much working capital will need to carry them through the first months of operation.

Every day, bankers see people who want a business loan for the “opportunity of a life-time” that “just can’t fail.” These want-to-be entrepreneurs usually attempt to explain their notion orally, and have not done the necessary research to determine the feasibility of the idea.

In order to be taken seriously about your business loan, it is imperative to write a formal business plan. When a banker analyses a business loan application he/she looks at the “eight C’s of lending:”

• Credit – It must be good, not necessarily perfect
• Collateral – Something of value to secure the loan
• Cash Flow – Ability of the business to repay the loan from operations
• Capacity – Your personal ability to repay
• Capital – Your cash investment or down payment
• Character – Yours!
• Conditions – Anything that can affect your business (industry, economy, etc.)
• Commitment – Your will to succeed

If you have lack of capital to grow your business and are approaching a bank for loan, each one of these items must be addressed in the business plan.

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If you walk into the banker’s office with a plan in hand, you have made the first step in separating yourself from the pack. If you have lack of capital and are looking to the bank for help, these are the 6 factors who have to be mindful of:

1. You will need good credit. If there are any problems on the report that can be remedied before meeting with a banker, do so. A lender may be able to make exceptions if you can document that a negative report was due to circumstances beyond your control. Include a detailed written explanation with supporting information in your financing proposal. However, if the report shows that you are irresponsible and you have not demonstrated a willingness to repay obligations, the lender will be unable to make a loan.
2. There is no such thing as 100% financing. You are going to have to put some money into the business and the more you do, the better chance you will receive loan approval..
3. A bank will require you to personally guarantee the loan even if you are incorporated. There is no way to avoid putting personal collateral at risk. If necessary this could include your house.
4. Some businesses are easier to finance than others. Since over 60% of all small business start-ups fail within 5 years, lenders know that the odds are against a new business being around long enough to repay a loan. An existing business is easier to finance if profits are sufficient to repay the loan. Also, many sellers are willing to hold some of the financing. Franchises are generally easier to finance than independent start-up businesses.
5. The process is not quick. If you must have the money to open by a certain date, make your loan application as far in advance as possible.
6. There is no such thing as a grant. We have never heard about anyone – anywhere – who got free money from the government to open any type of for-profit business.

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Those who have lack of capital, basically need two types of funding:

1. Start-up Capital

Start-up capital is the money you need to spend before the business opens. The amount varies widely depending on the type of business. Some examples include:

• Seed money – research and planning (usually for high-tech businesses)
• Security deposits for a lease, utilities, etc.
• Construction, renovations, signs
• Equipment, tools, office equipment, etc.
• Inventory
• Labor – hiring and training staff before opening
• Legal and accounting fees

2. Working Capital

Working capital is the money needed for day-to-day business expenses. You must have enough working capital available to pay all your bills until the business becomes cash flow positive and can support itself. This can take from several months to several years. After you complete your pro forma monthly cash flow projections you will have a very good estimate of the amount of working capital you will need. Allow extra for unexpected things. If you have just enough money to get started but not enough to properly operate the business, you may be doomed from the start.

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