Are you fundable?
For aspiring entrepreneurs, sometimes the hardest thing isn’t coming up with innovative ideas, it’s knowing which of those ideas are worthy of financing. Watch out for these six signs to know when you’re ready to seek the financing you need to turn that big idea into a reality.
It’s thrilling to hit on a great idea for a business and envision yourself at the helm of a lucrative new endeavour. Less thrilling, though, is the prospect of securing the necessary financing to get from idea to real-life CEO.
The truth is, finding the money to run a start-up requires a lot of preliminary planning, regardless of whether you’re going to pursue outside funding or choose to bootstrap your first few months. Most start-ups looking elsewhere to kickstart their cash flow will have the best luck securing funding through their personal networks. You can look to an angel investor, a loan from friends or family or even crowdfunding.
Regardless of which financing route you take, your potential investors need to see evidence that your idea is practically viable before they throw their hats into the ring. These six signs indicate that your business idea is ready for financing — and just might provide the evidence your potential investors need to be convinced.
1. Your idea serves a true, identified need
Your business isn’t going to work, let alone make money, if it doesn’t have a customer base. And, what’s more, if they don’t need whatever you’re creating. This may seem obvious, but many aspiring entrepreneurs get so caught up in the excitement of their big ideas that they fail to plan for how that idea will function in the real world.
Before you jump into the financing process, you need to identify your target customer segment and understand their behaviour. You should design your product or idea to deliver a solution to a problem that those customers are facing.
While we’re on the subject of product: You need to know what that product or service is, how it works and how you’re going to sell it. You’ve identified potential problems that may arise with your product, or barriers you may come up against in the market, and you have a game plan for troubleshooting those snags.
Then, you need to perform due diligence in your industry. Determine exactly how you’ll situate your business within the existing market, understand how your product can shift and grow along with it, and differentiate yourself from competitors. And make sure your customers can afford your product or service.
2. You’ve tested out your product, and it works
Pay attention, especially to that second part. Very few lenders will feel comfortable investing their money into just an idea, no matter how enticing it might be.
Your business idea is ready for financing when you have material evidence to bring to your investors’ table — whether it’s a prototype of a physical product or a beta version of a programme or website. Be ready to present any data, reviews or research you’ve acquired after testing out that product, too. And if that data isn’t favourable, you might need to go back to the drawing board.
3. You have a business model and plan
If your business model is the what, your business plan is the why.
Your business model indicates your business’s revenue streams, and your business plan lays out how you’re going to acquire those revenue streams. How is your business’s leadership team organised, and how is your business legally structured? What kind of equipment, staffing and marketing plan do you need to operate your business and generate income?
Both your business model and plan provide proof, both to yourself and to any potential lenders, that your business idea is practical and operable.
4. And you have a financial plan, too
Whether you’re pitching an investor or seeking a small business loan through a lender, your financier will want to see how you plan on using that potential money. You can’t just ask for money as an entrepreneur. You need to know exactly how much money you need, why you need it and how you’ll use it.
That’s especially true if you seek financing through an angel investor. Since these individuals lay their own money on the line to fund your start-up, they need to be sure your venture is sustainable, eventually lucrative and that you’ll use their resources wisely.
Poor financial planning, or no financial planning, certainly can’t convince potential lenders of your business acumen. So, draw up a financial road map that projects exactly how you’ll get from point A — where you and your resources are now — to point B, where you hope to be within the next one to five years.
Be sure to include a detailed plan of your projected business expenses, or how much capital it’ll take to get your business idea off the ground, and your operating expenses, or how much it’ll cost to keep that business going.
5. You’ve recruited a qualified team to execute on your vision
Even if you created your business idea on your own, in reality, every entrepreneur needs help kicking off, then operating, their start-ups.
Before you seek financing, recruit a capable and qualified management team to run your business, or have a hiring plan in place to do so ASAP. And if you don’t have enough relevant experience in the field yourself, you’ll need to gather a team of partners or mentors to fill the gaps in your knowledge. It’s crucial to acknowledge you can’t do and know everything yourself.
6. You can prove you spend money responsibly
Although you might not have a way to prove you’re responsible with business financing yet, you want to make sure you’re positioning yourself to create a track record so investors and lenders can trust you.
Even if you start with seed money from close friends, or crowdfunding from Kickstarter for your business idea, you may need to seek additional financing through a larger venture round or a small business lender.
That’s where the proof becomes necessary. For instance, if you’re working with a lender, they’ll want to know that your business is capable of repaying your debt before extending you a loan. And any other investor will want to know that any money they give you will be spent responsibly, especially if they’re expecting returns.
One of the best ways you can do that is to cultivate a healthy financial profile, and keep a high business credit score. Open a business credit card, and follow best practices to improve your credit score, like paying all your bills in full and on time and regularly checking your credit reports for errors.
Then, the proof will be in the numbers. Alongside a squeaky-clean track record and a strong personal credit score, a great financial history will position you for the financing your growing SME needs.
What Can A Business Loan Be Used For?
Read on below for what you can use these loans for.
Sometimes in the business world, you might need a financial helping hand. This is especially true if you are starting out as a business owner or building your business from where it already is. This is where business finance can be highly useful because you can use it for any number of issues that your business might be facing.
When you apply for any business loans you should know what you want to use the money for. For example, asset financing is used to lease, hire or purchase new equipment or vehicles for your business.
Small business loans can be used to boost your business funds or for purchasing new premises. Interested in applying for business finance? Read on below for what you can use these loans for.
You can purchase inventory
If you sell products, the chances are that your cash flow can often be dictated by having to restock your shelves. But if you have a business loan, you can purchase more inventory to replenish your stock and stay in operation throughout the year.
Purchasing new inventory during seasonal dips, such as selling out of items during the festive season, can become expensive. This is where finance can come in handy. You can have the funds deposited into your company bank account and use it solely for restocking your shelves, allowing better management of accounts during these trying times. It is not a long term solution, however, to use a loan to purchase inventory can be helpful for small businesses just starting out.
You can upgrade equipment
Having outdated equipment will put you at a significant disadvantage to your competitors. This can be remedied by taking out business asset finance in order to upgrade your current equipment. You can lease, hire or even purchase everything you need to maintain your original business plan.
For example, a transport or logistics company can use this finance to improve their fleet, to upgrade their current trucks, or to provide new technology to drivers to help them navigate the South African roads. If you are a boutique design agency, you can use your loan to purchase new computers with the latest software so that your staff is always on the cutting edge of all trends. On your loan application, be sure to list what you plan on using the money for so that you have accurate estimations of your interest rates.
Keep your office operational
Keeping your office operational means that you need to pay for day-to-day expenses. This can include anything from replacing an old coffee machine so your staff stays caffeinated to paying the utility bills so that your office does not go dark when you need electricity the most.
This could be seen as starting capital for small business owners, which you can then supplement with more income or repay once your business starts to earn more and become successful. You could create a list of all of your needs, such as paying lights and water bills or fixing kitchen equipment and look for those that you need to focus on the most. For example, your staff could bring their own lunches into the office in case you need to replace the fridge or you could strike a deal with a nearby coffee shop to save yourself from spending unnecessarily on expensive coffee equipment.
You can boost your marketing budget
Marketing is not easy to understand for everyone. While you might have a brilliant business mind, your aptitude for selling and marketing your company might not be your strong suit. This can be helped by investing a business loan into a marketing company for your strategy, which can help build awareness about your business and make it a success.
You will have improved brand visibility and can reach customers in new and exciting ways. And you will also see a significant return on investment when reports and analytics come in showing your business’s performance. Marketing is an integral part of building a flourishing business, so using your loan for this purpose would not be a waste. Be sure to speak to your lender about whether this is an acceptable use of your business finance and what the interest rates would be.
A business loan can be a sound investment, especially if you consider what it can be used for. You could look into purchasing new inventory for your shelves during a busy shopping period, or upgrade your machinery for your next big project. You can use the money to keep your day-to-day expenses from becoming overwhelming or boost your marketing budget so you can reach customers and build your business.
Does Your Business Really Need Funding?
Strategy, risks, and opportunities.
Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.
First, ask yourself some hard questions
Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.
Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.
Define your goals
The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.
Evaluate your financial pain points
Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.
It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.
Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.
Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.
Consider your options
Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.
If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.
If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.
However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:
- How long will it take before your investment starts covering the costs of your loan?
- How will you manage repayments if your forecasted growth doesn’t materialise?
- How can you pivot to reallocate resources if your plan is not working out as initially intended?
The bottom line
Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.
How Investors Choose Who To Invest In
Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.
The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.
The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.
Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.
1. Is she honest?
You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.
Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.
2. Does she work hard?
I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)
In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.
It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.
3. Is she smart?
Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.
Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.
4. Is she ambitious?
Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.
An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.
Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.
Read next: The Investor Sourcing Guide