Recently, I have been speaking at a great series of events called Access to Capital, put on by Dun & Bradstreet Credibility Corp. and sponsored by (among others) Bank of America. Every event is sold out, and for good reason: Entrepreneurs need access to capital.
It doesn’t matter where they are in the life cycle of their business. We meet entrepreneurs with nothing but a twinkle in their eye of a business they want to create down the road, and we meet seasoned vets who have multi-million dollar enterprises and need funds to keep the dream growing.
What is so interesting about the funding game these days is that there are just so many options available - many that folks don’t know about. That is one of the things we try and accomplish at these events – to teach people what their options are and how to get funded.
Let me drill down on that second issue first - getting your business ready for funding. It seems almost laughable, doesn’t it? Yes, I can hear you now: “Steve, don’t worry about that one. My business is definitely ready for some funding.”
But that’s not what I am referring to. What I mean is that if you want to get your business funded (using one of the options I outline in part 2 of this series), then you have to make sure your business looks as solid as possible to outsiders. That is how you “get ready” to get funded.
The fact is, banks want to lend to you. That’s their business. But even so, any business loan carries a degree of risk. With that in mind, it is your job to make it easy for the bank to say yes to you, and you do that by showing them that the risk of investing in you is minimal and that lending to you would be a solid, smart decision.
It is so important to meet with your banker early in the process. He or she can review your business plan, your P&L statements and so on and give you feedback on what else you might need to get that ‘maybe’ turned into a ‘yes.’
Whether we are talking about funding from a bank, an angel investor, a VC, or even Uncle Joe, as a general rule there are several things that lenders and investors look at when deciding whether or not to help fund a business. Here are the four main things you will need to drill down on before you ever pitch your funding request:
1. A solid business plan: No matter whom you go to to get funded, they will want to see your business plan. What is your marketing strategy? How will you deal with the competition? Where do you see your business going in the next five years and how do you plan on getting there? Those are the things you should cover in your business plan. Use it to show others that you really understand your business and industry and have a solid strategy for success.
2. Your team: Whenever I speak with angel investors, the one issue they inevitably fall back on is the team. Has the entrepreneur surrounded him or herself with the right people who have the experience and know-how to execute on the idea?
This cannot be underestimated. Yes, of course the lender or investor will look at your financials (as well they should), but they also care about the people behind the business. If you have smart, sharp, capable people on your team, the investor knows that you are doing something right. And if these smart teammates have bought into your plan, it makes it easier for the investor to do so as well.
3. Your financials: You may be tempted to use pie-in-the-sky numbers in your business plan to impress an investor, but don’t. Experienced businesspeople can see through inflated numbers immediately and, in the next moment, will conclude that either
- You don’t really know what you are doing, or
- You probably are not to be trusted
If you need to make financial projections, make solid projections based on real numbers.
4. Your skin: People want to see that you have some skin in the game too. They don’t want to be the only people taking a risk. Have you invested your own money? What is your sweat equity worth? Statistically, by having your own money invested in the venture, you are far less likely to fail than if it is funded entirely with OPM (Other People’s Money).
Next week: The many funding options available to you these days.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.