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Small Business Funding Myths – Starting A New Business

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.

Conclusion
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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