Startup loans are hard to come by
It’s no secret and shouldn’t come as a surprise to most, it is relatively difficult to obtain business financing for a new business, specifically to obtain a conventional bank loan. These financial institutions are in the business of making money … not losing it because of a ‘hunch’ or an unproven business. So if you are a new company or are at least thinking of starting a business, how can you solve this problem of getting a business loan from a conventional bank? Here’s the key: don’t be a new company. It’s easy to say, but not difficult to achieve if you practice discipline and commitment.
The main reasons why companies do not get financing are:
- Lack of concept
- Lack of market proof
- Low profit margins
- Lack of commercial and / or personal assets as collateral
Today, we will review the lack of proof of the market.
How to get a market test
It is difficult to produce and sell products and services to a market that does not exist or is too small. Start-ups do not take into account the size and profitability of the market they intend to serve. Due to the many options that are available to startups through social media and other online platforms such as Google or Yahoo, it is relatively easy to find out the market potential of a company. The recommendation is to apply the MVP or “minimum viable product” principle meaning you take a simple prototype of your core product and / or service offering and get it to the target market quickly. The purpose of doing this is to get quick feedback for the necessary revisions and to prove that the market exists. Also, to really get to know the market, go outside and ask potential customers. Identify multiple suspects in your product and / or service offering, and contact them via phone call, direct mail survey, or in-person visit. The main purpose of these activities is to get feedback and eventually a sale if it is mutually beneficial.
From what I’ve observed over the past decade from working and observing startups, it takes 12 to 18 months to really gain traction in a market. Do not confuse this with the initial idea test in the market. This should be quick to notice and will take no more than 30 days. In other words, if your MVP isn’t getting enough feedback and ultimately sales, then you abort the mission or review / retest it.
How do you strengthen your business finance case with market testing? Once you have proof of market for your business through sales and proof of cash received through commercial bank statements, include these documents in the commercial financing package. Show how the business loan will enhance the ability to gain more market share or increase profit margins through business growth.