Challenges Faced by Entrepreneurs When Sourcing Finance for Expansion

I wrote a piece on the difficulties faced by small and medium sized companies some years back. Cynthia, one of the readers of this accounting blog reached out to me via the comment section of the above referenced article with the below request:

“I’m doing research on entrepreneurship skills, please send me reasons why entrepreneurs and small businesses have difficulty in accessing finance for startup and expansion and suggest solutions to the problems”

A lot has changed between 2009 when the other article was written and now. Hence, the reason for writing a modern variant of the article. Cynthia, I hope this helps.

Entrepreneurs and small businesses often face challenges when trying to raise funds for the normal day to day business operations of their startups and when they want to expand. These challenges can be attributed to various factors, and here are some common reasons along with suggested solutions – sources of finance:

• Limited Collateral: Many entrepreneurs lack significant assets or collateral to secure traditional loans. This is a major obstacle for banks and lenders who require collateral to mitigate risk. No wonder Robert Kiyosaki said that banks don’t give you money when you really need it.

Solution: Explore alternative lending options such as microloans, peer-to-peer lending, or crowdfunding that may not require traditional collateral.

• Limited Credit History: New entrepreneurs often lack a strong credit history, making it difficult to qualify for loans or lines of credit. The few that has some credit history has a very messy one.

Solution: Build a credit history by using business credit cards, making timely payments, and maintaining a good personal credit score. Consider lenders that specialize in working with startups and have flexible credit requirements.

• High Risk Perception: Lenders perceive startups and small businesses as riskier investments, which can result in higher interest rates and stricter lending terms.

Solution: Prepare a comprehensive business plan that outlines your business strategy, market research, financial projections, and risk mitigation strategies. This can help reassure lenders of your business’s potential.

• Lack of Financial Records: New businesses may not have a track record of financial stability, making it challenging to demonstrate their ability to repay loans.

Solution: Keep detailed financial records from the outset. Consider working with an accountant to ensure accurate bookkeeping. Show lenders a clear path to profitability in your business plan.

• Industry Risk: Certain industries are considered riskier by lenders, making it more difficult for entrepreneurs in those sectors to secure financing.

Solution: Seek out lenders or investors with a track record of financing businesses in your industry. Be prepared to demonstrate your industry knowledge and expertise.

• Regulatory Hurdles: Regulatory requirements and compliance issues can be burdensome for startups, making it harder to access financing. I still struggle to understand why government of some countries deliberately place some impossible hurdles in the way of entrepreneurs.

Solution: Consult with legal and financial professionals to ensure compliance with all relevant regulations. Research government programs or grants designed to support small businesses.

• Limited Network: Access to financing can be heavily influenced by an entrepreneur’s network. Those with strong connections to investors or industry experts may find it easier to secure funding.

Solution: Build and nurture your network through networking events, industry associations, and mentorship programs. A strong network can provide valuable introductions to potential investors or lenders.

• Inadequate Pitch/Presentation: A poorly crafted business pitch or presentation can deter potential investors or lenders.

Solution: Invest time in crafting a compelling pitch that clearly communicates your business idea, market opportunity, and financial projections. Practice your pitch and seek feedback from mentors or advisors.

• Market Timing: Economic conditions and market trends can affect the availability of financing. During economic downturns, lenders may be more cautious.

Solution: Be flexible with your timing. Consider bootstrapping or exploring non-traditional financing sources during economic downturns and pursue traditional loans when the market is more favorable.

• Inadequate Research: Entrepreneurs may not be aware of all the financing options available to them, limiting their choices. This is dependent on some factors like your location and the nature of the business you seek to venture into. Venture Capitalists are well experienced in this kind of research – do well to reach out to one if needed.

Solution: Thoroughly research and assess various financing options, including grants, angel investors, venture capital, business incubators, and government programs. Tailor your approach to the most suitable options for your business.

• Credit Score Improvement: If personal credit is a hurdle, work on improving your credit score through responsible financial management.

Solution: Pay bills on time, reduce personal debt, and manage credit responsibly to improve your credit score over time.

• Bootstrapping: Consider bootstrapping as a way to build your business with limited external financing, reinvesting profits to fund growth.

Solution: Start small, focus on generating revenue, and reinvest profits into the business. This approach can reduce reliance on external financing.

By addressing these challenges and exploring the suggested solutions, entrepreneurs and small businesses can improve their prospects for accessing the necessary financing to start and expand their ventures. Remember that the specific challenges and solutions may vary depending on the nature of your business, industry, and location. So be sure to adapt the tips in this article to your unique circumstances.