Financing a College Startup

It seems that every college student wants to have their own startup. Either work in one or own one outright. In recent years, we have seen an increase college business plan competitions, which often provide startup funds to the entrepreneurs. And of course, there are also many well known college students that got venture funding for their companies. These are great ways to get funding. However...

Getting Funding is Hard

Getting funding is very difficult, even if you happen to go to the right school or if you have an innovative market disrupting product idea. However, finding financing may be close to impossible if your business offers just an incremental improvement to an existing business model, or if it does not have the potential to be "huge" or go public.

Unfortunately, many businesses are not destined to be huge or public. Actually, many owners prefer to keep their companies small and private. Because of this, they are often left by the side of the road, unable to get funding.

Unrealistic expectations

Part of the problem is that many college entrepreneurs have unrealistic expectations, at least when it comes to their chances of getting professional funding early on. They read stories or see TV shows where people get funding. They focus only on the successes, which colors their expectations.

The sad reality is that most won't get funded. So, if you are a college student wanting to finance a start up - what do you do?

A guide, specifically for students

Most of the information on business financing that's out there is written for folks that already have working experience, and more importantly, some assets. College entrepreneurs don't fit this mold, they have little work experience (with some exceptions) and even less money. Obviously, conventional bank loans and bank financing are out of the question. Likewise, conventional advice does not always apply either.

Well, if you are looking for realistic options, you should read this article - finance your college startup. It has been written specifically for student entrepreneurs and intended to be a realistic guide. While not comprehensive, it provides a great overview.

Failure leads to success

One last word, it's very likely that your path to funding will be filled with challenges, problems and even snide remarks from friends and parents. Don't see any initial failures to get financing as actual failures. See them as practice runs that are helping you get in shape for the main event - to get funding and launch your company.

Community ownership. An alternative way of business financing?

Today we have an article authored by Becky McCray over at the Small Business Survival blog. I like it because it provides a clever solution to a common problem to business owners - small and large. How do I finance my business if I don't have access to conventional business financing? Becky provides a common sense answer right out of rural America:

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Many small businesses can't qualify for a small business loan from a traditional local bank. A bad credit record disqualifies many. Lending standards have tightened. Some places are limited by local banks that don't support small business; others don't have locally-owned banks any more. The good news is that alternatives are available.

One of those alternatives is community ownership. We're used to thinking only of debt financing (loans), but there is also equity (or ownership) financing, like a corporation issuing stock to raise capital. Now, most small businesses aren't in a position to issue stock, but some could be targets for community ownership. In most community ownership cases, the business is partly based on doing some social good. And that's true of these two examples of community ownership in real towns.

Minneola, Kansas, population 745.

Minneola, Kansas, welcome sign.
Photo (CC) by Les Stockton on Flickr

Their grocery store was closed for 2 and a half years. In March last year, it re-opened with community ownership.

Interested locals formed a board, then a corporation, and sold shares for $50. They raised $200,000. Volunteers came together to do the renovations and get ready for opening. (That's another common theme for community ownership: volunteers get involved, too.)

Following another of the Small Town Rules for business success, they diversified their income streams, adding a deli, a fresh meat department and a floral shop.

Lampasas, Texas, population 6,700.

Their hospital closed in 1991. The community decided to reopen it "at any cost." It's possible they were heartened by knowing community volunteers were key in establishing the hospital decades before.

Groups, businesses, and individuals got involved in raising $565,000. They contracted with a health system to manage it, and reopened it in December 1991.

It not only stayed open, it thrived. In 1997, the community sold the hospital to Adventist Health System. It remains open in the community today.

Read more from Metroplex Health System 

Your town?

If your town is facing the loss of a business that is a community asset, or you are looking to establish a business that will fill a big need, consider community ownership. You'll find more detail at the national Main Street site, in their article Community-owned Businesses: How Communities Become Entrepreneurs 

About Becky McCray

Becky McCray shares more lessons useful for urban and rural business in the new book,Small Town Rules written with Chicago entrepreneur Barry Moltz. She also owns a liquor store and a cattle ranch in Oklahoma, in the U.S., and is a recognized expert in small business and social media. She publishes the popular website Small Biz Survival on small town business, and she and Sheila Scarborough co-founded Tourism Currents to teach tourism professionals new ways of marketing their destination. Her professional life is clearly an example of Small Town Rule #3: Multiply Your Lines of Income.

[posted by permission of author]

Close more sales. Make sure you scratch an itch!

Most of the sales people I see around go about the business of selling and handling prospects in the wrong way. And it's costing them - and their prospects - time and money. It's a bold statement to make, but I think I can prove it to you. Just start looking at the sales folks around you and you will see them make these two mistakes time and time again:

1. Focusing on themselves - not the client
2. Trying to sell into an impossible situation or client

The combination of these two mistakes results in the majority of botched sales. I have never thought that selling was - or is - about using any special techniques. Rather, making sales is about using common sense and selling to others like you'd like them to sell to you.

In sales, I often like to use the sales metaphor of a "itch" and a "scratch". Your prospect has contacted you because they have an problem (the itch) that you can solve (the scratch). In principle there is a good match here. Your client has an itch that needs to be scratched. And you can scratch the itch, providing much needed relief. If you can agree on price, you have a sale. As I see it, the sales process is that simple. You match the problem with a solution and agree on a price.

However, we keep screwing the process up and making it less effective - and less successful - that it should be. We waste time and make prospective clients and non-clients very unhappy.

Keeping the itch/scratch metaphor, here are some of the most common problem situations:

They have an itch. But your scratch may be  too expensive

This is a very common problem. Both parties agree that the problem and the solution match, but there is a question with the value/cost of the solution. This is probably one of the toughest problems to solve because you never know if the parties are posturing to try and get the better deal - or if the complain is real.

The way we handle this is very simple. We do market research. Lot's of it! That way we have a good idea of what the market price is for our services. So when we are negotiating, we are no longer too concerned about our pricing relative to the market. Rather, we try to focus on whether we provide enough value to our client. With this in mind, we try and show the prospect how our solution provides the best value.

Obviously, there are situations where our services are too expensive for our prospects. This is common when we deal with low margin companies. In this case, our "scratch" is just too expensive. When that happens, we tell the prospect that we can't provide any value to them - which is the truth. We don't waste their time trying to convince them to work with us. Rather, we try to refer them somewhere else who can help them. And then, we move on.

Your customer tells you they have an itch (but they really don't!)

This is a common situation that actually can waste a lot of time for both parties. The customer thinks they need your product - maybe. They engage with you, ask lots of questions, and provide wishy-washy answers. They seem genuinely interested, but you can't ever tell for sure. And in the end, they don't buy your "scratch". Why? Well, they really never had an "itch" that needed scratching in the first place.

We solve this problem very simply. Most of the prospects that need our factoring services have a certain set of symptoms/problems/itches. Basically, symptoms that indicate an itch that we can scratch  For example, many have low bank account balances and a lot of money tied in slow paying invoices. Others haven't been able to meet payroll even though they have a ton of work. Each industry has their own list of symptoms.

You can solve this problem much like a doctor diagnoses a disease. Doctors ask a lot of questions trying to zero in on your problem. Do the same. Ask lots of specific questions.  And if you don't find a problem - tell them. And move on to the next prospect.

The prospect has an un-scartchable itch

Like the previous issue, this situation can waste a lost of time for both parties. The prospect has an "itch" that can't be scratched - no matter how hard you try. The problem with these situations is that they can take a long time to figure out and diagnose. Often, you will talk to the prospect for a long time, delving into details, until you realize that you can't help them.

The way to solve this is similar to the way you solve the previous problem. You look at the situation and start looking for symptoms. However, this time you start looking for incurable symptoms. For example, in my industry, we look if the company has convoluted billing practices and invoices that can't be verified. We also see if they have guaranteed / consignment sales, which can't be funded. These are indications of a situation where I won't be able to help. The customer has an un-scratchable itch. Again, we tell them and move on.

Your customer has a cut. You still want to sell them a scratch

We see this every day in high pressure sales situations. The customer has a "cut" but the salesperson only sells "scratches". So they start pushing their "scratch" very hard and try to convince the client that the scratch will help the "cut". Scratching their cut won't bring relief - it brings pain! If the sale closes, it will lead to an unsatisfied client and loss of reputation.

The only way out of this one is to tell the prospect that you don't have the right solution for them. If you know someone that can help them, direct them that way.

Conclusion - How I sell

I am not saying that I am a star sales person. Far from it. But I have a method that works for me, and works well. When I speak to a  prospect I always go back to the itch/scratch metaphor. First, I determine if the client has an itch that we can scratch. If they do, I tell the prospect how my scratch will benefit their itch. However, I always focus on their itch - on their problem first. This is crucial. Listen first. Once they (keyword - they!)  feel I understand their problem, I move on to explaining the solution.  I make sure that they understand the benefits and advantages of my solution with respect to their problem - and with respect to my competitors. And since they know I am familiar with their itch, because I was listening, they trust my solution. No high pressure tactics. No sales tricks. No "sales-weasel" techniques. No trying to sell a scratch to cure a cut. I treat them how I like to be treated myself. The most successful sales folks I know use this technique to great success.

Having said that, I'd like to part ways with a post on Becky McCray's blog - it's good advice about any sales or marketing plan.

How To Beat Walmart If You Own a Small Business

Some time ago, rural business entrepreneur Becky McCray from the Small Business Survival blog, posted an article about a reader who lamented that wholesalers charged high prices to small town retailers. She wondered if anyone knew strategies to get wholesalers to lower their prices. It didn't take long for the conversation to turn into the common subject of how do small businesses, rural or not, compete against their local Walmart who is always (presumably) getting great prices from its wholesalers and selling products on the cheap.

Let's setup the scene

This happens to small retailers across the country every day. They have been operating happily and profitably for a number of years in their little niche. And one day, one of the biggest discount retailers in the world decides to open a store nearby.  Traffic to the store dies within days, or weeks of the grand opening. Before long, the small retailer goes out of business. Another entrepreneur becomes an unemployed casualty in the battle between small retailers and big box companies.

It doesn't have to be like this. At least, not for everyone. And hopefully not for you.

Is the "Walmart Price" a Myth? 

Walmart is a business. And like every business, their objective is to gain market share, increase revenues and generate returns to their shareholders. They have their methods. And, like them or hate them, they are very good at what they do. And the fact that they are one of the most successful companies and have lots of satisfied customers is proof that they are great at what they do. No use or sense in denying it. Fortunately, they are not perfect either.

I believe that most people think that Walmart is the cheapest store for everything. Walmart certainly tries to promote that image in its ads.  However, my recent price comparison experiences prove that this was not always the case. For many items, I found that other retailers had either cheaper products, a better value - or both. That has been my experience with Walmart when shopping for tables, computers and flat screen TV's.  Don't believe me? Look at the price comparison on the right. In the case of that specific TV, Walmart is a whopping 24.50%  more expensive than Best Buy. That is just one example, and I have seen many.

Likewise, I have found that their in-store service leaves much to be desired. While their employees are generally nice and professional, they are not nearly as knowledgeable about their products as those folks who work in specialty stores. This leads me to my next point.

Walmart is not invincible

It's well known that Walmart once wanted to take a piece of the DVD rental market. And many folks were concerned that it wouldn't be long before they took the whole market. But in 2005, they lost. They capitulated to Netflix, as this article shows. Netflix is a well run company that specializes in the online movie rental business that is much smaller than Walmart. But they won.

Oh, and you still think that Walmart is the king of cheap stuff? Not always.Walmart is also losing customers to these specialty stores (hint: they sell things for $1). They may be formidable - but not invincible. But the question is still open - how do you beat them?

Well, don't fight fire with fire

Most people try to compete against Walmart by lowering their prices. In my view, going into a price war against Walmart is a losing proposition. Even if you are able to get cheaper prices than Walmart (maybe temporarily), they have already won the perception war. Regardless of the reality, everyone always thinks that Walmart has the cheaper prices and they are very good at furthering that perception. Ultimately, Walmart has a very well oiled purchasing machine and could easily win a price war with any small or mid sized retailer. This is almost a surefire way to go out of business.

So - How do you compete?

Fortunately, Walmart usually announces their store opening plans with plenty of lead time. They often (but not always ) need to go through lengthy approval processes. This is definitely true in the cities, where opening a big box store can take a couple of years. I assume it is faster in rural areas. This is good news for you. The process can be so slow that you should have time to adapt - and evolve. And hopefully, succeed.

Find your true value: focus on specific niches

The first thing you should consider is finding profitable niches within your industry and start focusing in them. Use niches where you can deliver true value. Let me use a couple of examples. If you own a liquor store that sells beer and wine, you should consider moving to more specialty beers and wines that won't be found at Walmart. Then, cater to folks that really like quality beer and wines. Or if you have a shoe store, focus on selling specific types of footwear that you won't find at Walmart - like quality leather shoes. In these cases, you may need to go a little bit upscale. But it's time to look at your products and start trying to find profitable niches and start pruning those products that won't help you survive.

Develop name recognition

Your next step is to start developing name recognition in the niche - or niches that you select. To use my previous examples, if you own a liquor store you may want to start hosting wine tastings or specialty beer tastings. Maybe you can convince the brew-master of a local beer your sell to come to your shop and do a beer seminar. If you own a shoe store, you may want to give short seminars about how to select proper footwear and the effects of wearing the right footwear on health. The point is that you want to be the "go to" store or person for your product niche.

Additionally, start implementing a customer communication and interaction strategy. Keep in touch with your customers. You can use tools like Facebook and email lists to do so. Don't make the mistake of overdoing it and swamping your clients with countless and needless emails or Facebook posts. They will quickly get rid of you. But do post relevant articles and information on a regular basis. If you are new to social media you can learn a lot from Becky McCray (link at top of article) and Chris Brogan.

Focus on the customer experience

One last point - remember what you actually sell. Many people think that Apple just sells great products. They don't! Apple sells a great customer experience, of which great products are only a part of. Don't buy that theory? Go to an apple store. It's a great lesson on how to treat a customer very very well. These guys are polite, professional and seem to live by the motto "You will be satisfied!" Their slick products are part of an even slicker bigger picture. That's  great model to follow and how you keep customers. Let's see if your local big box retailer treats their customers like that.

One Way To Finance Your Home Based Business

Getting financing for a home based business can be very challenging, especially if you need conventional financing. Most banks and lending institutions don't lend to home based companies and often require that you have substantial collateral that can be used as security for a business loan or line of credit. In reality, few business owners have any meaningful collateral, except perhaps for their homes. The collateral requirement puts loans out of the range of most small companies - home based on not.

Fortunately, a business loan is not required to fix the most common financial problem that home based businesses have.

So - what is the most common financial problem?

Here is a little known fact. A large percentage of home based businesses work with corporate and government clients. They are selling products or services to other businesses. Now, most large companies often demand and get 45 day terms on their purchases. This is a common practice. It means that the small business makes the sale now, but must wait up to 45 days to get paid. This creates cash flow problems because few small companies can afford to wait that long for a payment. And this is one of the biggest financial problems for small companies.

How to fix this cash flow problem  is a dilemma that many home based businesses face every day. Just how big is this problem? Let's look at the following chart:

This chart shows the percentage of home based businesses for selected industries. As you can see,  the majority of management service companies, engineering and architecture firms, wholesalers (non durable) and manufacturing companies are home based. This is a very important fact since most people picture companies in these industries as midsize or large corporations. They are not! They are home based companies. For the most part, it looks like a large part of the national economic backbone are home based companies.

The fix - two simple solutions

A large majority of these companies would not need funding if their corporate clients paid quickly. The problem comes from the fact that they have to wait for payment, but don't have enough reserves to hold on for a long time.

One simple solution is to ask clients to pay sooner. Actually, some larger clients may be happy to pay an invoice sooner if you offer them an incentive for their quick payment. A common industry practice is to offer a 2% discount in exchange for a quick payment. This benefits the home based company because they get paid sooner. And it benefits the corporate client because it increases their profitability (by decreasing costs). But there is just one challenge - what do you do if your client does not want to pay sooner?

The answer is simple - can use small business factoring financing. This solution finances your open invoices. It provides many of the benefits of getting a quick payment, but without requiring your clients to pay sooner. You work with an intermediary company that funds your slow paying invoices and provides you with immediate working capital. The transaction concludes once your client pays the invoice, on their regular schedule. You can get more information how the transaction works here.

Advantages and benefits

There are two important advantages of factoring invoices. The first one is that receivables factoring is much easier to get than a business loan. The most important requirement is to have commercial clients with good credit. Aside from that, your company must not have liens. 

The biggest benefit of this solution is that you will be able to offer net 30 terms to clients without having to worry about waiting for payments. If you have been wary of getting new sales - or worse - turning new clients away, this program could solve your problems. And more importantly, the line is designed to grow with your sales, as long as they qualify. This allows you to use this solution to grow your company and enable it to reach its full potential.

Additional chart information:

Here is the detailed information on the chart. It shows percentage of home businesses for different industries. Here is the breakdown:

77% of Management services companies

63% of Engineering and Architectural

84% of Wholesale trade companies (non durable)

44% of Motor freight transportation

58% of Manufacturing companies

(Source: Table 4-2 Home based Business - The Hidden Economy)

  

How NOT to Finance Your Home Based Business

Getting business financing for a home business can be very difficult. There are a few reasons for this. In part, most banks and institutions shy away from lending money to home based business owners because these types of companies usually require small amounts of money. Banks prefer to lend larger amounts of money to bigger companies. Also, home based businesses have high failure rates which makes lending to them risky. Here is some SBA info on how many companies close per year.

But blaming banks and institutions for lack of funding is premature, though. There are many business financing tools that cater specifically to small and home based businesses. And even with those companies, many home based owners fail to get funded. What's sad is, that in many cases, they would have gotten the funding if they hand't made a silly mistake. We see this every day. Here are the top three mistakes that kill your chances to get funded:

Mistake #1: Don't be prepared

Most home based owners have unrealistic expectations of what it takes to get funded. Often, we get calls from folks that think that we will finance them just off a phone call, without doing any due diligence. Let me ask you - would you give your money to someone you just met over the phone? Yeah, I didn't think so.

The fix: Getting funded will take some work and effort on your part. Before calling any finance companies, be sure to get ready. You should have these handy: business plan, business licences, tax documents, income statement, receivables aging report and a one page executive summary of your company. And, you should have your story straight. Be sure that you can articulate, why you are in business, who you help, how you profit and how the funding will help your company grow.

Mistake #2: Don't keep track of who you talk to

Thanks to the internet, you can find many companies that fund small businesses with just a few keystrokes  However, most home based business owners think that they should contact as many companies as they can. Wrong approach! Before long, they get confused about who they are talking to and how far along they are in the discussions. Trying to apply with many different companies - using a shotgun approach - often fails because things fall through the cracks Ultimately, you waste a lot of time but never get the money.

The fix: Document all your conversations, keep track of all your emails and use a methodical approach. Be sure to interview a limited number of finance companies and only submit an application to the top two or three candidates. If you try to work with more companies at a time, you will likely waste your time, and theirs.

Mistake #3: Don't act professionally

Just because you work in a home office, it does not mean you should be unprofessional and act casual with prospects, vendors and possible financial partners. First impressions count. There are a number of deals that we have walked away from simply because the owner was unprofessional. Sure, they may have a good business opportunity. But, can they really execute and grow it by being unprofessional? Will they be able to get clients? Perhaps in the short run, but not in the long run.

The fix: Behave and speak in a professional manner. Be sure to have a separate business phone line and do not use your home phone to take client/vendor calls. Lastly, make sure that your home office is away from any loud TV's, radios or kids.

One Alternative

You can go here to learn of one way to finance a home business.

The True Value of a Factoring Proposal

The factoring industry is extremely competitive. One of the most common tactics to win a prospect is to try and issue a proposal as early on as possible in sales process. Sometimes, these proposals are issued based on a 10 minute conversation with the client and the promise that the the client will submit documents and other information later on. Many prospective clients get a false sense of security from these proposals. They often think that their financing and approval is virtually guaranteed.

Unfortunately, I am about to throw a bucket of very cold water on that theory. Think about it this way, why would a factoring company commit to funding a business, without doing any due diligence and based on a short conversation? Would you? By the way, if you answered yes to the last question, I have a deal for you :-)

Although these factoring proposals don't have much value as a proposal per se, they provide very valuable information to someone that is evaluating finance companies. Often you will learn:

• How your rate is assessed
• The advance rate
• If there are any due diligence or application costs
• Ancillary costs

This information is very important if you are trying to determine the proposals true cost of factoring (it's not just the rate!) or if you are comparing factoring proposals. But in terms of guaranteeing that you will get funding, they have minimal value.

How can I be certain that these quick proposals don't have much value? Well, most of them have the words "nonbinding" in them. According to the Merriam Webster dictionary, it's defined as "having no legal or binding force". Right then and there, they are saying it is not enforceable. Not only that, many of these proposals also have wording that states that the funding company "reserves the right to adjust any of the terms within this rate quote or withdraw it completely without notice. Product pricing, advance rates, rebate provisions, and program features are subject to change without notice at any time and for whatever reason". As you can see, phrases like the last one only hammer in the point that the proposal is non binding and has minimal value.

This brings me to the point I want to drive in. Having a proposal does not, in any way, guarantee that you will qualify or receive any funding. If you are speaking with many factoring companies, as prospects often do, you should not terminate discussions with other companies just because one company gave you a proposal you liked. I have seen many prospects do that, thinking that their funding was guaranteed, only to see their fall through. This leaves them in a very uncomfortable negotiating position with the other companies. In my view, it's not over until the contract is signed by both parties and you receive your first funding.