Getting into position for capital infusion
Just as you wouldn’t head to the car dealership’s finance desk before being ready to make a deal, it’s just as critical to put some work into preparing for presentations to potential investors in your business. Whether you’re seeking a Small Business Administration loan from a bank or big bucks from a venture capitalist, it’s critical to put your best financial foot forward to show that your business is a good risk, says former banking executive Denise Winston, founder of Bakersfield, California Money Start Here, a financial education company.
She suggests spending some time on the following four key areas before meeting with prospective lenders or equity investors.
- Beef up your business plan. When your business is smaller, your business plan can be a simple document that outlines the broad strokes of your business, plus some basic financial projections. However, as you grow, both in terms of your company’s size and its capital needs, it’s critical to show lenders and investors that the company has leadership depth and vision. “We want to see that the company is not just reacting to the market, but that they’re thinking strategically about their role and how to recognize opportunities and make the most of them,” says Jonathan Dowst, senior vice-president, Credit Products Executive, Bank of America.
In the plan, highlight any strengths, such as key personnel, exceptional location, or lack of competition in the market, that might work to your advantage. Prospective lenders and investors will look for strong positioning and indications that the company understands how to disrupt the marketplace in ways that will allow it to grow and capture greater market share.
- Clean up credit. The first thing a prospective lender or investor is going to do is pull your credit—both business credit and those of company owners, says Winston. It’s important to review each of these profiles to ensure they are accurate and reflect the business and individuals in the best possible light, she says. Do this several months before meeting with lenders or investors to allow time to correct any errors, outdated information, or inaccuracies. A spotty or incomplete credit history can raise red flags even for established, growing middle-market businesses.
- Make the money a priority. When your company was smaller, handling the finances in between other leadership responsibilities was fine. For bigger businesses seeking outside funding, lenders and investors will want to see a chief financial officer or, at least, an employee or team dedicated to ensuring that the company’s payables, receivables, and other financial functions are being addressed competently on a daily basis. Proper invoicing and collections are a critical part of this process, says Winston, as a company with significant collection issues may trigger lender or investor concerns about cash flow.
“A lot of business owners, are not great at collecting because they’re the business owner and they have these relationships. So, they need to put somebody on the job and make a concerted effort to get their accounts receivable up to date,” Winston says. If it’s possible to collect a portion of your receivables upfront or offer discounts for early payment, that can help ease the receivables crunch, too.
- Forecast the future. Any investor is going to want to see an ability to repay. Lenders will want to see projections that illustrate how the business will bear the financial load of the loan payment each month. An equity investor, such as a venture capital firm, angel fund, or super-angel investor, is going to want to see how the business plans to generate a significant return—usually three to five times the initial investment—within five to 10 years for the investor. Your financial statements and business plan should fully illustrate these projections, presenting the business as a good risk.
By spending some time on these key areas, growing businesses can become significantly more attractive to lenders and investors. Fewer businesses would have trouble attracting outside capital if they put more time into showcasing their strengths, shoring up weaknesses, and putting their best financial foot forward when speaking to lenders and investors.
Article provided by Inc.com. ©Inc.