If you need a small business loan to help you launch and grow your dream business, then having direct business owner experience in the industry may matter to a lender. In this overview, you’ll learn why that’s the case and what you can do if your dream business is in an industry where you don’t have direct experience.
What is direct experience in a field or industry?
For many potential business owners, it may seem like having business-management experience is enough to get financing – and, sometimes, it may be. But if your experience was in a restaurant and your dream is to open a spa, then there are knowledge and experience gaps that you may need to overcome before getting a loan approval.
That’s because lenders want to know that you understand how your business will generate revenue, and that usually means having hands-on experience with the main services or products your business will offer. For example:
- A restaurant owner should know how to prepare the food they’ll serve, and the kinds of equipment needed to run a successful and efficient professional kitchen
- An auto repair shop owner should understand how to fix cars, evolving auto technologies, and which products and services are most profitable
- A dental clinic owner should ideally be a dentist or have significant experience in dental practice management
While knowing how to handle paperwork, manage finances, and run the administrative side of a business is valuable, these skills alone won’t convince lenders that you can make money. There’s also the question of staffing – specifically, what would you do if you lost key staff with the skills your business needs? If you can’t step in, your business could suffer significant negative impacts.
How to identify relevant business owner experience
Just as every business is different, the educational and professional experiences that entrepreneurs bring to potential business ventures will differ. For that reason, there’s not a standard set of criteria to determine the ideal level of direct business owner experience. To gauge your experience, ask yourself these questions before you apply for a small business loan:
- How well do you understand how this business makes money day-to-day?
- Do you know the typical challenges in this industry, and could you create cost-effective and efficient solutions based on your experience?
- Could you step in and perform the core services, if needed?
- Have you worked in multiple roles within this industry?
- Have you managed other staff members who perform core services and functions?
- Do you know if there are seasonal fluctuations related to this business, and if so, do you know how to manage finances and other resources through them?
- Do you have experience setting prices and managing costs in this industry?
- Have you hired, trained, or managed staff in a similar business?
- Do you have experience with inventory management relevant to this business?
- Have you successfully handled customer service issues in this field?
- Have you managed business finances or budgets professionally for this industry?
- Do you understand how to reach your target market in this industry?
Although many business owners can’t answer ‘yes’ to all of these questions, being able to positively respond to most or many of them will be favorable to a lender.
How to overcome the business owner experience gap
If you find that your direct experience is minimal for your dream business, don’t despair. There are several options to help you overcome knowledge and skill gaps to make it more likely that a lender will work with you on potential financing.
Here are some ways:
- Self-fund your business to get it off the ground: If the business you want to launch doesn’t require a lot of financial resources to get it off the ground, then you may be able to self-fund it as you gain experience in preparation for a loan to support growth. However, self-funding a full-blown operation may be difficult to do. Even still, there are always ways to start small while dreaming big.
For example, if you dream of owning a bakery but don’t have professional baking experience, you can start by taking classes at a local community college, trade school, or online. As you learn, you can rent space in a shared community kitchen and sell your goods at farmers’ markets to test your recipes and get valuable feedback. This gives you time to learn the processes, equipment needs, competition in your market, revenue and expenses, as well as establish relationships with potential customers.
As you build up your direct experience, you can also meet with your local Small Business Development Center (SBDC) and SCORE mentors. They can help you develop your business plan and financial projections, assess your ideas, markets, and competitors, and find potential vendors, lenders, and other resources. - Gain relevant experience or education in the industry: Before you move forward with a business plan and financing applications, take the time to really get to know the industry.
For example, if you dream of owning a café, you should work in a café and try to take on as many different types of roles as you can. Spend time in the kitchen, tending the coffee bar, managing staff and inventory, and whatever else you can do. While this takes time, having a couple of years of direct experience not only opens the door to potential financing, but it also gives you the opportunity to be sure it’s the field you want to be in, before you commit your time and resources to it. - Bring on a business partner who has the experience you are missing: With your entrepreneurial skills and a business partner with the key industry experience you need, together you’ll be able to succeed.
For example, if you want to open an auto-repair business but have no experience actually fixing cars or running an auto-repair shop, you can bring on a business partner who does. However, it’s important to know that this person will be as responsible for your new business as you are and will also likely have to give a personal guarantee for the business.
Each approach can get you where you want to be – launching and growing a business in a field you enjoy.
How business owner experience impacts your loan approval
It’s common for aspiring entrepreneurs to believe (or hope) that having related experience, if not direct, could and should be enough to secure a small business loan. Here are two examples to clarify why that’s not always the case.
Example 1
Let’s say you worked as a baker for eight years before applying for a loan to open your own bakery. Your loan application highlighted:
- Five years as a head baker at a popular local bakery
- Specialized training in pastry arts
- Experience ordering supplies and managing kitchen staff
- Knowledge of food costs, pricing, and profit margins
When you met with your lender, you brought samples of your work and detailed plans for your signature items. The loan officer could clearly see that you understood both how to create products customers would buy and how to price them for profit. Your loan was approved.
Example 2
Let’s say you spent 10 years working in restaurant-management software sales, which meant you spent a lot of time visiting restaurants and gaining exposure to their operations. You decided you would like to open an upscale Italian restaurant because you loved many things you experienced while visiting restaurants: the creativity from the kitchen, the hub of the dining room’s happy customers, and the energy within the industry.
Despite your passion for the industry, the lender wouldn’t approve the loan because:
- You never worked in food preparation
- You haven’t managed restaurant staff
- You had insufficient experience in menu development or food-cost management
The lender suggested you either:
- Partner with an experienced chef who could also be a loan guarantor
- Start with a smaller concept to build experience
- Work in restaurant operations for a year or two before reapplying
Excited to launch your venture, you bring on a chef-partner with 15 years of experience who agreed to guarantee the loan. With this, you were able to secure the financing you needed.
Lenders want to support small businesses, but they need to be confident that you can generate enough revenue to repay your loan and grow your business – and direct experience in the revenue-generating aspects significantly improves your chances.
Pursuit provides financing, guidance, and more
When you’ve figured out the best approach to resolve a business owner experience gap or if you’ve got direct experience already, Pursuit can help you get financing to launch and grow.
We’re a leading non-profit small business lender with loans from $10,000 to $5.5 million and we can help you secure financing for working capital, equipment, the purchase or construction of commercial real estate, to refinance business debt and more for businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington.
We also offer the Main Street Capital Loan Fund and Flex Loan programs – a special financing opportunity specifically created to help new and early-stage small businesses in New York State and Pennsylvania.
Start your application to learn more!
