Those of you who have been reading this site for awhile will remember that I am starting a business. Well my first loan application got rejected today. Apparently my cash flow projections weren't rosy enough so I need more owner capital. The problem is, I was extremely conservative. The bank asked for the assumptions that went into my financial projections, and I had margins of error factored in all over the place. For instance, I expect 10% of a certain category to desire my services based on data from similar businesses, so I put 8% in my projections (and made a point of saying that I used a lower number to factor in a margin of error). Sixty percent of customers are expected to seek our services again but I used 25%. I guess I forgot a major rule of business – hype always triumphs substance.
I thought banks would like seeing that I could do only 1/3 of the business I expect and still turn a profit, but I guess not. So, I plan to resubmit it to a different bank with much higher numbers. It just seems stupid to me for them to ask for revenue projections for a business that doesn't yet exist. We do this all the time for proposals at work, and someone basically pulls a number out of their ass, then everyone uses it like it has some validity, then when it turns out to be wrong by a factor of 100, everyone acts surprised. I can make an educated guess, but the truth is that I could probably find some way to justify any number that I wanted to hit. All I would have to do is change my assumptions.
Anyway, I recently met a 40ish guy who left a good corporate job and is looking to start up a couple of small businesses and try to grow them into something larger. He wanted to partner with me but I gave him some things to think about and told him we would talk again this week, so maybe that will turn into something.
One more thing – isn't the whole point of the SBA loan to cover banks so they can make riskier loans to businesspundits like myself? Oh well, at least I am having fun.