Contrary to popular belief, business plans do not generate business financing. True, there are many kinds of financing options that require a business plan, but nobody invests in a business plan. Investors need a business plan as a document that communicates ideas and information, but they invest in a company, in a product, and in people.
Small business financing myths:
- Venture capital is a growing opportunity for funding businesses. Actually, venture capital financing is very rare. I’ll explain more later, but assume that only a very few high-growth plans with high-power management teams are venture opportunities.
- Bank loans are the most likely option for funding a new business. Actually, banks don’t finance business start-ups. I’ll have more on that later, too. Banks aren’t supposed to invest depositors’ money in new businesses.
- Business plans sell investors. Actually, they don’t—a well-written and convincing business plan (and pitch) can sell investors on your business idea, but you’re also going to have convince those investors that you are worth investing in. When it comes to investment, it’s as much about whether you’re the right person to run your business as it is about the viability of your business idea.
I’m not saying you shouldn’t have a business plan. You should. Your business plan is an essential piece of the funding puzzle, explaining exactly how much money you need, and where it’s going to go, and how long it will take you to earn it back. Everyone you talk to is going to expect to see your business plan.
But, depending on what kind of business you have and what your market opportunitiesare, you should tailor your funding search and your approach. Don’t waste your time looking for the wrong kind of financing.
Where to look for money
The process of looking for money must match the needs of the company. Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for example, between a high-growth Internet-related company looking for second-round venture funding and a local retail store looking to finance a second location. In the following sections of this article, I’ll talk more specifically about the types of investment and lending available.