Startup Scares: Risks of Starting a Business

P2Binvestor Alfred Feth quote

Starting a business is an exciting, yet daunting, task. There are many risks of starting a business. Entrepreneurs have to consider a multitude of factors: Who is my key demographic? How will I market my product? How much should I charge? One of the most important questions you have to ask is, how will I finance this new endeavor? Finding the funding to get your startup off the ground is probably the most challenging part of building a business. A mistake in financing can quickly turn any small business owner’s dream into a living nightmare.

They say bad things happen in threes. Here, we examine three small business finance nightmares that will have any small business owner sleeping with the lights on. Read on, if you dare. The names below have been changed.

Kevin and Stacey Leeds – Seafood Shop Sleeps with the Fishes

As an accountant who managed the finances of other’s businesses, Stacey Leeds thought it only logical that she should be able to run her own business. So that’s what she did in 2007, quitting her day job to open a seafood shop in Alberta, Canada. The business started off strong, but when the economy went into a recession in 2009, luxury items like lobster tails became an unreasonable purchase for many people.

To keep the business running, the Leeds pulled from their investments, and remortgaged their home. This wasn’t enough, and eventually the couple borrowed another $15,000 on their unsecured line of credit, as well as taking out a bank loan for $60,000. None of this was able to get the business back on its feet, and it closed in 2010.

Stacey says she would love to own her own business again, but Kevin is not so sure. Trying to rebuild their credit and pay down their debt (in addition to saving to send their daughter Jessica to college) has been difficult, and he feels that having two steady incomes is a safer bet for the family. History has shown that Kevin might be right, as 75% of new businesses don’t succeed. However, experts say that Stacey’s odds of success would likely be higher the second time around.

The Leeds learned a lot from their failed business experience, which could help them succeed in a second endeavor. In hindsight, there were a few key elements missing from the Leeds’ first try. The couple lacked a strong business plan that accounted for times of scarcity and slow business. According to financial planner Alfred Feth, “Most people who fail at their business know what they are doing, but are undercapitalized.” The Leeds needed a safety net of capital that could have carried them through the dark times.

The Leeds’ story does not have a happy ending, at least in the sense of successful business ownership. In 2007, choices for funding a business were mostly limited to banks and unsecured credit lines. But with the new choices in alternative finance, the options are endless for raising the necessary capital to get up and running again. Hopefully Stacey Leeds will have a chance to turn business ownership into a dream come true and erase the memory of this debt-filled nightmare.

Eddie and Cheryl Warren – Banks Behaving Badly

Last year, London-based newspaper The Daily Mail reported on “unscrupulous behaviors” by Britain’s two state-backed banks: Lloyd’s and the Royal Bank of Scotland (RBS). Allegations have been made that these two banks, in particular, have engaged in behaviors that have essentially destroyed many small businesses, charging exorbitant interest rates and unrealistic fees in order to make a profit.

Eddie and Cheryl Warren are just one family whose business has been affected by these unethical practices. In 2007, the couple bought the Bold Hotel, using a combination of their own money and funds from a loan from the RBS. One of the conditions of the loan was that they would have to take out an interest rate swap, which resulted in extraordinarily high fixed interest rates on the loan. As rates went down, the Warrens were forced to pay expensive penalties, and ended up being assigned to the bank’s “Global Restructuring Group” (GRG). This group is allegedly designed to turn failing businesses around; however, the designation comes with inflated fees and rates for the business owners.

RBS has been accused of engaging in practices that force businesses into the GRG. When the businesses can’t pay the fees associated with the group, they fail, and the bank then buys their assets at extremely low prices. The Warrens purchased their hotel for close to $6 million, but after being placed in the GRG three years later, the bank valued it at only $3 million. West Register, an RBS-owned property company, ended up buying the hotel for even less.

The Warrens’ story is a nightmare of epic proportions, one that the couple, who are now splitting up, in part due to the stress of these events, will not wake up from anytime soon.

Helena Crumpton – Business Was (Almost) a Bust

Crumpton had a great idea for storing her delicates, one that would help keep the shape and structural integrity of her expensive molded bras. Though she originally set out to develop something for personal use, her friends quickly convinced her that she had a marketable product. After positive feedback from potential buyers, the aspiring entrepreneur decided to move forward with her vision.

Since banks weren’t lending, Crumpton and her husband used their own money to back the project, but delays in the production process meant money kept going out, while none was coming in. After taking out several additional mortgages, the couple hit a low point and was about to lose their home. They sent SOS messages to friends, and received some help, but not enough.

Crumpton’s small business dream was turning into a nightmare at a rapid pace. Just as all seemed lost, an old friend suggested she connect with a company that might be interested in investing in her product. She teamed up with the company Pirtek, who agreed to provide equity funding to get the necessary patent and initial production costs covered. This financial boost took away the immediate financial pressures and Helena Crumpton was able to see her idea come to life.

Bra-Voe was a winner at the 2013 Sydney Design Awards, as well as the 2014 New York Design Awards. This is a beautiful example of how alternative funding kept the nightmare of home foreclosure from becoming a reality. Finally, a happy ending!

There are lessons to be learned in any failure. Knowing that not every small business succeeds is a fact that any entrepreneur needs to keep in mind, but it shouldn’t stop anyone from trying to achieve a dream. Having a solid business plan, and being diligent in researching all the choices and details when it comes to funding a company, can help keep your dream from turning into a failed-business nightmare.

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