Small Business Funding Myths - Starting A New Business
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There exist many misconceptions regarding funding for small businesses. Some prospective business owners may believe that obtaining necessary capital for their is an easy and straightforward task, when, in fact, the process may be more complicated than initially anticipated. For example, many business owners may feel the need not to implement an effective marketing strategy or prepare a well-devised business plan, which can often greatly contribute to a company’s failure. Furthermore, there is an erroneous belief that the U.S. government can offer financial assistance to those who apply and that entrepreneurs can increase their chances of acquiring angel capital if they actively solicit the help from numerous contacts.

The realities of many common myths are explained below. An individual considering the prospect of entrepreneurship should be aware that it takes time to evaluate the different options in order to obtain funding and that they may even experience repeated rejections before the needed capital is raised.

Myth No. 1- "I can easily find funding for my new business in a few months."

The Truth- Obtainingstart-up funding is a long and tedious process that can actually take years to achieve. A wise entrepreneur is one who acknowledges this extensive process yet is patient and seeks all means to accomplish this goal. First, these entrepreneurs take time out to meticulously research prospective investors with experience in their field of industry. In the course of this process, they may be rejected multiple times; however, they still find time to optimize their resources by networking extensively with others. They also use their rejections as a means to refine their elevator pitch and devise a well-detailed business plan. Most investors will not even consider providing necessary funding for a venture unless the entrepreneur has demonstrated such preparation. Their invested company’s products and services must also prove to be successful in trial marketing, which may also take a considerable amount of time to execute. In addition, entrepreneurs must establish that they have exhausted all other financial opportunities to launch their business. Along with the due diligence process, which can take months to achieve, it may be several years until the entrepreneur is able to obtain desired funding.

Myth No. 2- "My business idea is great and unique. I should get funding right away.”

The Truth- Often times, entrepreneurs are overconfident about their business ideas and innovations. Just because they feel that their products or services are marketable does not mean that their ideas are good enough for investors or the general public. Every year, thousands of people truly believe that their inventions will be the next "million dollar” idea, when, in fact, the majority of these ideas will lead to many disappointments. Many business ideas will simply not survive in the market due to the competition among major competitors and the development of further well-devised products. That is why entrepreneurs need to research and refine their ideas, which takes much needed planning. In fact, an invention should be test marketed after establishing such preparation in order to get ample feedback from customers. An invention is considered "fundable” when a test model (pilot model) can prove that consumers will be willing to pay for the product(s). This will not only show investors that the company has the potential for producing a large return on investment, but it also gives time to polish any flaws before mass production of a product takes place.

Myth No. 3- "I know everything about my business; therefore, I do not need to create a business plan.”

The Truth- According to the United States’ Small Business Administration (SBA), approximately 90% of all small businesses fail within the first two years of operation. It is also striking to note that the majority of these companies have no business plan. If a business plan exists, it may not be updated or the company may even fail to comply with their existing plan. This is why most successful entrepreneurs agree that the key to sustaining a startup is by creating and enforcing an effective business plan. Most prospective investors will not consider investing in a company without a business plan, which primarily focuses on daily company operations, the management team and employees, finances, etc. Business owners and employees are encouraged to follow their business plan and update it accordingly throughout the development of their company.

Myth No. 4- "I know how to market my products; therefore, I do not need a marketing plan.”

The Truth- A marketing plan is a written document that details the advertising objectives of a company. It documents a business’ marketing approach and expenditures in promoting their company, brand, or company’s product line. Many startups depend on their marketing plan to gain publicity and to promote newly released products or services. Consumers, on the other hand, are highly influenced to buy products from companies with effective marketing plans and strategies. Hired professionals are known to devise successful marketing plans, which are vital components of a company’s overall investment. Through an effective marketing strategy, plan, and public relations, an enterprise and their product line can gain public recognition, further contributing to their success and profitability.

Myth No. 5- "The more investors I contact, the more likely I can find funding.”

The Truth- Often times, this myth is accompanied by sending mass e-mails and direct mail to hundreds of investors with the hope of successfully targeting prospective ones. Investors will admit that this is clearly the wrong approach when trying to find investors since mass mailing is considered a waste of money, time, and energy. Investors who grant small business funding should be sought by quality, not quantity. Entrepreneurs are encouraged to thoroughly research several potential investors at a time who have a solid track record of success in their field of industry. Even though there is a high probability of rejection, the entrepreneur should not be discouraged and should continue to research probable investors. Upon this research, each prospective investor should then be sent a personalized request. By sending these custom-made requirements, the entrepreneur will gain credibility from investors, who will recognize them for conducting their own due diligence.

Myth No. 6- "I can easily get funding from the SBA.”

The Truth- This is a very common myth of many entrepreneurs. The fact is that the Small Business Administration (SBA) does not lend money directly to business owners. Instead, they act as a guarantor through local lenders in order to stimulate the economy in many communities by promoting startup growth. A prospective applicant should have a good credit history, proof of income, a solid business plan, and collateral in order to be considered. Even though it is smaller in amount than most banks lend to startups, approval of an SBA loan will increase one’s chance of obtaining additional capital from many lending institutions.

Myth No. 7- "I can get government funding for my startup.”

The Truth- Most federal grants are available only to medical, scientific, educational, and non-profit ventures. If a startup does not fall into one of these categories, they will most likely be rejected for their application. Non-profit organizations that do get accepted for government grants are usually related to research or product development. One important fact to mention is that grant funding is usually awarded in small amounts and is not a sufficient source for financing a startup. Businesses that acquire grants often depend on multiple sources of capital, including capital from lending institutions and private investors. It is also a very competitive process to obtain a federal grant since there is only limited funding available. Entrepreneurs who strongly believe that their business falls into the category of receiving government grants should target different organizations and propose a grant request.

Myth No. 8- "Venture capitalists will give me money for my startup.”

The Truth- Venture capitalists usually invest in companies that are already established, not ones that are in the early stages of development. Due to the fact that venture capitalists pool their money from multiple sources, they are extremely selective with funding applicants, choosing their investments in "safe” companies, ones that have already established a large degree of success. Angel investors, on the other hand, typically invest in startups and early stage ventures, companies that have not yet established any degree of success. They use their own money for funding young companies, making their investments more "risky” than that of venture capitalists. However, they are also selective with their applicants, who need to convince them that their company will produce a large return on investment.

Many of the common small business myths contain some of the most inaccurate information about funding a startup. Now that these funding myths have been debunked, it is the entrepreneur’s duty to conduct their own ample research in order to learn about the credibility of any given information. In addition, business owners are encouraged to work with skilled professionals with expertise in their field who can create for them practical business and marketing plans so that they can successfully find adequate funding for their venture.

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