8 Things You Really Need to Know Before You Seek Funding
Most businesses have approached financiers at some point for the money their business requires to run its operations, or perhaps to even expand.
But in most cases, such attempts meet a dead end.
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Sometimes, even funding requests from successful companies with well-established track records were turned down.
While this could happen due to a variety of reasons, the most common reasons why funding gets rejected is largely due to the 8 reasons below.
If you’re looking for funding, use this as your handy checklist as you go through your process.
1. Show that there is a market for your product or service
This is a crucial piece of information for anyone who is deciding whether to finance your business. If you cannot prove that there is a potential demand for your product, it is highly likely that your proposal will be turned down.
In most circumstances, the correct way to determine whether your product or service will sell in sufficient volumes is to conduct market research.
Many business owners neglect this as they find it too expensive. The worst thing that you can do is launch a product that is of no value adding to your competitor’s.
A new travel agency specialising in holidays was under the impression that the primary factor for a purchase is the efficiency with which their bookings were handled.
But upon conducting a market survey, they found that travellers were looking for recommendations for an itinerary crafted to their specific needs and interests.
Their market research also showed that customers wanted to talk to someone who had regional expertise and who could provide them detailed information.
As a result, the company partnered with travel agencies in other locations and changed their SEO strategy.
The new travel agency saw an immediate upswing in client bookings.
You can discover if there is a market for your product or service by spotting trends via various tools available online.
One good tool is Google Trends. A search for ‘travel to New York’ on Google Trends would result in:
An analysis of the data would give an indication if your company is moving in the right direction.
2. Your core team should be ready
A financier knows that the difference between a successful business and an also-ran is the presence of a high-performing team of qualified workers who share a common desire to make the company succeed.
No matter how hard the entrepreneur expands the business or have the most brilliant strategy and product, efforts are futile unless they are backed by a strong performing team.
Teamwork and a high level of trust between a business owner and his top employees are absolutely essential.
Peter Thiel of PayPal told his co-founders Max Levchin, Elon Musk, Chad Hurley, Reid Hoffman and Luke Nosek that the relationship between business owners and their employees should be that of friends.
This was one of the reasons PayPal saw great success.
The core team subsequently became known as the PayPal Mafia and individual members were involved in other successful startups like LinkedIn, Tesla, Yammer and YouTube.
Take-away:
The potential of your business that financiers see comes not just from the numbers, but also the people. Simple logic; quality of the team builds quantity eventually.
A photograph of the PayPal Mafia
3. Prepare a detailed business plan
This consists of a written description of your company’s future, basically what you plan to do and how you plan to do it.
A business plan that replicates the strategy of your competitors is a definite turn-off for your financier. Be original and unique in showcasing the strengths and advantages of your business over the rest.
The Business Plan Should Cover:
- A year from today, what will be your business revenue 1 year later?
- How many locations will you operate from?
- How many employees will you have?
- Details about your products and services and the revenue model.
- What are the best case, worst case and likely scenarios?
- What is the size of your industry?
- Are there any market forces or changes in technology that could alter the ground rules for your business?
- An analysis of your competitors and your edge over them.
One of the simplest and best business plans was devised by the legendary Fred Smith of Federal Express, who wrote it to fulfil his MBA thesis requirement.
His plan to create a hub in the middle of the country where all packages would be shipped from was simplistic but revolutionised the courier industry.
4. Prepare a cash flow statement
Making a cash flow statement is easy. But having one that stands up to scrutiny and convince your financier that you have done your homework is more difficult than you think.
Banks or investors would want to assure themselves that you would be able to earn a respectable Return on Investment on the funds they fund you.
Typically, they would look at the following financial ratios and cash flow ratios:
- Cash flow from operations – essentially, this ratio reveals how much you would get for every dollar of sales. The higher the percentage the better. If this ratio deteriorates over time, it is a sure sign of trouble.
- Cash flow from operations/Total assets – illustrates how well a company uses its assets to generate cash flow.
- Cash flow from operations/Current liabilities – reveals the company’s debt management practices.
- Return on equity –summarises the company’s operations by showing the net income as a percentage of shareholder’s equity. This is a crucial profitability ratio.
In 2014, Amazon’s sales were $89 billion and it made a net loss of $241 million. But it
The company has been making minimal profits or small losses since its inception but has always been cash positive.
5. How much funding do you need?
Many funds seekers have this problem. What is your stated purpose and how much is sufficient to achieve that?
Remember that there is a good possibility that everything will cost more than you expect and take longer than planned to accomplish.
You may need to restart your fund-raising activity to make up for under-estimating your requirement. If this happens, you could possibly lose your customers and market share in the meantime.
Pamela Lim is the first Singaporean entrepreneur to achieve dual-listing approval for
Take-away: Calculate the costs involve to gauge the correct amount needed before seeking for Business Financing. You shouldn’t go with a ‘ask for as little” or “ask for as much” mentality. Moderation is key. You wouldn’t want to underestimate or be too ambitious.
6. Do scenario planning
You must show the financier that your business is prepared to meet the challenge if some of the assumptions made undergo changes.
If your current strategy is dependent on the occurrence of one of the scenarios that you have developed, it is best to show that you have alternative plans.
Remember that scenario planning works on two levels. First, it forces you to put down on paper the steps that you would take if an unforeseen challenge or a new opportunity comes up.
Secondly, its value lies in providing vital links between organisational processes such as strategy making, risk management and leadership, all of which requires reactions in a suitable manner in view of changed scenarios.
Currently, many oil companies and others whose future depends on the price of oil are in the process of constructing scenarios that assume different prices of crude in the future.
While it is impossible to predict the price with any certainty, common wisdom says that it is unlikely that prices will exceed $100 per barrel in the foreseeable future because at that level it is possible for U.S.
Take-away:
Take-away: Demonstrate and emphasis to your prospective financiers that you will not assume an unchangeable present in the future, and that you have a thought-through alternative plan.
7. Know the value of your company
If you are raising equity funds, this criteria assumes great importance. It will determine the amount you can get for ceding ownership of a certain percentage of your business.
A popular method is to use discounted cash flows to determine the value of your company. You would need to calculate how much your business would generate every year and then discount the amount using a certain rate of interest.
The lower the rate of interest that you use, the greater would be the value of your company.
Of course, this assumes that all cash generation is important and disregards the tangible assets that your company holds or the patents that it owns.
Take-away:
Every industry has some norms on how a company is valued. For example, restaurants are valued at 1.5 to 2.5 times the discretionary cash flow’.
8. Don’t display a sense of urgency
This could be the most important factor to keep in mind when seeking funds. If you send multiple reminders after your presentation, it is likely to make your prospective financier uncomfortable and doubtful.
Even if the financier intends to provide you funds, your desperation could result in a change in their decision.
Take-away:
Instead, create a sense of urgency in your financier. This is not easy, but if your business plan and level of preparedness are of a high level, it can be accomplished.
Do Not Speak To The Banks Before You Read This Complete Guide
Did you know? You may be paying more than the suggested amount of financing costs if you borrow funds using traditional methods. Get this full guide to get a complete picture of all the interest rates of financiers in Singapore
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