I underwrite small-business loans at Impact Loan Fund, a Community Development Financial Institution in Philadelphia. Like other CDFIs, we help businesses access capital when traditional banks and lenders wouldn’t, like if founders have lower credit or limited collateral, or when a company is early in its life cycle.
Our role is different than that of an investor. For our fund to offer capital, a business has to show enough operating history, revenue and — most importantly — profitability.
Founders should think more like lenders, and less like investors.
Venture capital investors work differently. Startup founders usually think about getting funding that way because VCs are okay with taking the risk of losing their money. They know some of their investments will not play out well, but the ones that do can have big payoffs.
On the contrary, as a CDFI lender and underwriter, I must do a ton of due diligence before I can present a business to our loan committee. My job is not to bet on potential; it is to assess survivability. I have to be confident that a business can repay its debt.
That’s why I think founders should think more like lenders, and less like investors.
When you look at your business in an honest light and try to find the holes in your startup assumptions, you will make better business decisions. Especially when it comes to who you take money from and how much money you truly need.
What happens when I underwrite my own startup
I will use my own startup as an example. When I put on my lens as a lender, the answer is clear: The business would not be able to pay back a loan if I wanted to get one. Kommunity is not generating enough revenue to support a sizable business loan.
You might say, “Well then, that is why you get investors — so you can grow your business, and eventually your business will make enough money to be able to get a loan.”
Maybe, but maybe not. Most startups burn large sums of money, and few make it out alive. Many of them die on the journey. Between you and me, I do not want Kommunity to be another failed startup that burned money and did not fulfill its vision and mission.
As a lender and credit analyst, I look at my startup with critical eyes and say to myself, “I need to improve the product and get more customers.” I want to become a profitable business. I want to raise capital on my terms.
Speaking as a lender who dives into the finances and business plans of both startups and established businesses all the time:
Your idea will most likely not turn out how you expect it to. Your assumptions about your customers will punch you in the face, and you will realize that you did not do enough to prove to yourself that your company actually has a market.
Smarter ways to fund the early stages
I have funded Kommunity with grants, revenue it has generated from our clients, and one angel investor. I also have access to credit, which has been useful to pay for things here and there and help with cash flow.
If you are a startup founder looking for funding, I suggest you look into CDFIs. Some CDFIs will support new businesses, and most tech companies do not need a ton of money to get started. A microloan can help you get the business going without using your own capital.
In Pennsylvania, the PA CDFI Network has a helpful list of those that support businesses at all stages.
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A powerful Philly grant is fueling small businesses — but few know it exists
The program relies greatly on a partner network of lenders to fill in their clients on the opportunity.
The City of Philadelphia also has a program called the Business Lending Network that connects businesses looking for funding with lenders. The city will fund half of your loan request, up to $35,000. For example, if you get a startup loan for $10,000, the city will give you another $10,000 that you don’t have to repay. That is $10k that can go straight into your marketing budget to help spread the word about your startup. In order to receive this grant, however, you must apply for a loan.
Before you pitch investors, underwrite your own business. If the numbers don’t work, no amount of storytelling will fix them.
The goal is not just to raise capital. It’s to build a business that survives long enough to matter.
