— March 30, 2019
One of the most difficult aspects when starting a business is Investment. You can try to convince investors and venture capitalists, but if you are new to entrepreneurship, your chances of getting funding through these channels are rather slim. You can also discuss it with your bank, and even with your family and friends to see if they will be able to lend you funds, but it’s often a difficult battle.
Crowdlending: what should a budding entrepreneur do?
Crowdfunding is the best choice available to you. You can start a crowdlending campaign to request the funding you need and authenticate your idea in the process. But don’t underestimate, crowdfunding campaigns require a lot of work. If you really want to get into business and you will be willing to invest the energy and time needed to endorse your startup project.
Crowdlending has shown a significant change in the way entrepreneurs estimate and give birth to their products. As the mobile or smartphone has brought communication and technology to everyone, crowdlending has put investment and financing in the hands of the masses.
First failure: you can always try again
Crowdfunding failure is the opportunity for you to learn from it, why it failed and this could provide you with the lessons you need to make modifications for your next campaign.
Thus, each attempt would provide you with invaluable feedback and data in the real world. The chance to appear on a crowdfunding platform that receives hundreds of thousands of visitors each month gives you a very good exposure rate.
This audience will share their comments and help you guide the design of your future products. You must understand that it’s not just about money; your crowdlending can help you in finding future customers, start building a fan base and product validation.
Establish realistic crowdfunding goals
One might think that the longer a crowdfunding campaign lasts, the more money it raises. As per Kickstarter, the statistics show that a high percentage of funding comes during the first days of the campaign. It always follows a lull, followed by another peak in the final days of the crowdfunding campaign.
By setting your campaign to a month, you reduce the lull between the initial peak and the final peak of funding.
Many entrepreneurs are tempted to overestimate the investment they need to start their project. This is because they have probably never done the proper research to determine what will be the necessary costs for startup. So before starting your business, do your necessary research.
Learn about the real costs. Get tangible numbers. This process will help you set achievable and more realistic funding goals.
The Entrepreneur and The Money
Do not underestimate the financial needs of a young company, and do not wait for the urgency to find funds. Does this mean that business creation is reserved for the rich? No, luckily: capital, loans of honor, bank loans, risk capital … financial devices allow the young leader to support its growth.
Do not underestimate the needs at the start
The business creator is often optimistic and evaluates his financial needs to a minimum, often reducing his initial investment needs. In the case of service companies, in particular, these are limited. However, it must be remembered that the starting bet is the main source of financing that the company will have until reaching its break-even point.
It is common and almost normal for the company to make losses during its first years of operation. The losses will reduce the company’s “own funds” (the capital plus the aggregation of results each year). The starting capital must take into account these losses, they will not be financed by the banks.
Moreover, it is essential to take into account the need for working capital. It is the financing of stocks and money due by customers (2 months of sales in theory, up to 6 if the customer is the state). In the same way, it is quite difficult to finance this need in working capital; some devices exist, such as factoring, but they are dangerous because the bank can suspend them at any time. It is, therefore, necessary to anticipate these needs as soon as the company is launched.
Finally, in estimating financing needs, it is better to provide an initial budget for communication and advertising; an expense that will not be counted as an investment – even if it is. To this, it is also necessary to add a margin of safety so that a risk of the life of the company such as theft, an unpaid or litigation does not destabilize it.
Capital, communication weapon
Once the creator has estimated these needs; how to finance them?
First, he has to put money from his personal wealth into his business; it’s capital. Once invested, this money will never be recovered. Either the business will be profitable, then the creator will be able to receive dividends; either she will disappear, and the creator will lose what he has the best. This is the rule of the game, and the creator must assume it.
Capital is a financial communication weapon, “Here’s what I’m ready to bet for this company”. Banks will not lend more than this amount at the beginning of the life of the business. In addition, the amount of the initial capital will appear on all official documents of the company; meaning “this is what this company weighs” vis-a-vis external interlocutors, customers, suppliers, employees, partners.
There is very good news at this stage: the state subsidizes the entrepreneur at 25 %; in fact, ¼ of what the creator (or relatives) invest in the capital of SMEs is deducted from the amount of their income tax. It is possible to pay this money over several years to make the most of this very interesting device.
If the creator’s own property is not sufficient to raise the necessary amount of capital, the creator can borrow money from a bank, on a personal basis, but the bankers will require a guarantee. On the other hand, there are unsecured loans, known as “loans of honor”, which are granted to entrepreneurs through associations. These networks support the projects that seem promising for the future, by evaluating the “business plan” less than the personality of the creator.
Get into debt right now
At the beginning of the business, when the capital is invested, do not hesitate to solicit the banks without waiting. Credit support schemes exist for entrepreneurs and cannot be used later. In particular, the loan to start a business: a loan totally guaranteed by the state, which all banks are supposed to offer. It is accompanied by a “classic” bank loan, some of which is also guaranteed by the State.
This credit can be used for material investments, such as furniture, computers or a production tool. Indeed, banks prefer to finance this type of expenditure rather than intangible investment, or the need for working capital.
Even if the use of the loan does not seem necessary at first sight; Creative credit terms are easier than in the early years of the business, especially if they make losses. Moreover, one can also keep in mind that the interests of the credits are deductible from the taxable result of the company; it is therefore fiscally advantageous to be financed by the debt.
During the first exchanges with the bank, it will probably ask for a joint guarantee from the manager. That is, the manager makes a personal commitment to repay the bank if the company cannot do it anymore. This means that the creator commits his assets beyond the capital of the company. The joint and several guarantees seem inevitable in many cases. On the other hand, it is necessary to negotiate the conditions: it must not engage the spouse of the creator; it must be limited to the amount of the credits which have no guarantee of the State; the amount must decrease each year when the credit is repaid.
Unfortunately, banks do not fight to have business creators as customers. Many of them simply refuse to open professional accounts. For them, it is a risky clientele, even if the initial credits are guaranteed as we have seen above. However, a banking partner who understands the business plan is an indispensable asset for the creator. At this stage, the accompaniment of creators in networks (incubators, incubators, networks of entrepreneurs …) allows them to have more weight to negotiate with banks.
Later in the life of the company, it is useful to have a second banking partner. Indeed, the conditions and the services proposed can evolve, and it will be useful for the creator to compare the offer of several banks.
In summary, we can take the example of a business project that required 30,000$ of initial investment, plus 40,000$ for the financing of the losses of the first two years, and 30,000$ for the need for funds. turnover and the hazards of the life of the company; or 100k $ of total funding need. This project was financed by 30k $ in contributions from the founders, 40k $ in the loan of honor, 8k $ in business creation loans, 22k $ in bank loans, 50% of which are guaranteed by the State. and a joint guarantee from the manager for the remaining 50%. The company thus financed reached the breakeven point after 3 years with a turnover of 700k $ .
Cash is life
When the entrepreneur has mobilized his financing, the company can start. All expenses, suppliers, payroll, taxes, will be paid by a single source of income: customers. Finding customers will probably be the most important mission of the creator during these early years. It is the turnover that will be the indicator of the progress and success of the company in the long term.
Entrepreneurs can solicit numerous organizations and associations to obtain help to finance their project. These aids are sometimes coupled with a support proposal that helps to structure the creator’s approach. Financial aid may have specific objectives and be granted under certain conditions. These conditions differ from industries to industries and sometime geo-location, so you must research about startup business loans by industries to get an idea.
Yet, the health of the company, its life or death will be conditioned to anything else: its cash. If at any point in the company’s course, the money runs out, then everything can stop, even if the commercial success is at the rendezvous. The disaster scenario can be triggered by a single payment incident: check refused, deletion of lines of credit or overdrafts, degraded credit insurer rating, shortening the payment period of suppliers, increase in working capital, decrease greater cash, default of payment declared by a creditor in court. Many entrepreneurs have lost everything in this infernal spiral. However, the partners of the company (bank, customers, suppliers) all have an interest in it being good; the creator must endeavor to communicate well with them when he encounters difficulties.
The creator must set up an organization that allows a good receipt of his invoices: requests for down payments, advance payment, direct debit, subscription to credit insurance or recovery. He will pay close attention to the public order: sometimes the state does not respect the law and pays well beyond the 60-day legal deadline … Moreover, sometimes it is better to refuse an order than to manage the receivables.
If the cash is tight, the creator will be able to appeal to a particular mode of financing: the overdraft. This is sometimes useful for coping with large movements of funds during the month. It cannot be a long-term financing instrument. The banker, who will probably require the guarantor’s joint guarantee for the amount of the overdraft, may cancel his authorization without cause overnight.
When the creator has passed the stage of profitability, he asks himself the question of development. This can be linked to innovation, or simply to the ramping up of its activities. Different mechanisms exist to support this development.
If the company is innovative, then you have to use the “tax-research credit”. This scheme makes it possible to finance 30% of expenses related to innovation or research. It is still unknown to some creators, but it is unavoidable. In the first 8 years of the company’s life, it can also obtain the status of “young innovative company” if its expenses related to innovation exceed 15% of its total expenses. This status allows you to save costs and taxes.
Finally, the creator can also obtain grants. These are often paid by the communities; in many cases in support of projects that promote employment.
Venture capital, for which projects?
The financing that has been presented so far leaves the creator (and possibly his family) with 100% of the shares of his company. Conversely, venture capital is the creator to sell a share of the company, against a capital increase subscribed by third parties. Generally, the investor’s shareholding is a minority, which leaves operational control to the founders.
This type of funding is not suitable for all projects. Indeed, if it is possible to “raise” sizeable amounts (from € 100 thousand for private business angels, from 1 million dollars for venture capital organizations); the problem is the exit of the investor. The latter takes a very important risk, so it will require a high return on investment, in a short time (for example three times its stake after 4 years). The development of the company must, therefore, be very fast (growth of the activity higher than 50% per year, for example). This may be the case for companies that aspire to be leaders in new markets; or who have a competitive advantage related to technology or patent.
In addition, the “exit” of the investor cannot be done during an IPO, because this phenomenon has almost disappeared; it will be necessary that the creator buys at a high price the shares of the investor (by borrowing), or that the investor resells them to a market player, so to a competitor … which can go against the interests of the founder. On the other hand, if he wants to sell his business at a high price, investors in his capital will help him in the search for buyers for a high transaction price.
Beware of another trap, because if the company works well, but less spectacularly than expected, the creator can lose everything. Depending on the shareholders’ pact, investors can force the sale of the company, recover their bet preferentially, and leave the founder on the floor. The venture capital weapon is therefore double-edged; it does not replace bank financing for more “traditional” development projects.
The business creator will face money throughout his career. Initially, to raise the necessary funds; on a daily basis to monitor cash flow; at the end to negotiate the transfer of his business. Why is a company created? For his personal fulfillment, to create something, to be his own boss; for the money too! Money must be the ally of the entrepreneur, not his enemy; he must learn to use it as a tool, and keep his independence.