A must read before you seek business financing.
As a small business owner you might agree that coming up with the idea for your business was a piece of cake. Financing the business, however, is an entirely different story! Sometimes you may only have very few opportunities to present your business for funding, so it’s your job to make sure they count! Here are five strategic steps to help you fund your business and get to the next level before you start pitching to potential investors and lenders.
1. Put Your Money Where Your Mouth Is – You have a great idea, product or service that everyone will love, huh? So how much of your personal funds have you invested in it? Expecting a bank or investor to come in and save the day when you haven’t spent all that you can to make it happen is a bit naïve. If you haven’t bet the farm on your idea, then don’t anticipate anyone else to.
Last year I attended a White House forum on entrepreneurship where Tyler Perry gave the keynote address. During the Q & A, participants lined up to ask about how to find investors or receive access to capital. Without a blink, Perry reminded the audience very firmly that he was his first investor. The early part of Perry’s career was riddled with one failure after another. Luckily, he didn’t fail on anyone else’s dime. Imagine flopping in a business you truly believed in and then having someone else breathing down your neck and demanding their money back. Perry also brought up the point that putting up his own money allowed him to ensure that the business wasn’t so financed to death by outsiders that when his opportunity to get true buy-in came, he no longer controlled any of the rights.
2. Understand Your Options – Bank loans and angel investors are not the only options for financing a business, but it’s hard to tell until you are first clear about a few things. Make sure you can answer questions like “For what specific purposes will any capital be used?,” or “What is the current economic state of your industry as a whole?” You can find a complete list of sample questions on the Small Business Association’s site under “Determining Your Financing Needs.”
Without knowing fundamental questions such as these, you could be wasting time in all the wrong places. For example, you may find that you qualify for additional resources, such as grants. While grants are often seen as “free money,” many of them come at a price. You may be required to match the funds which you can hold as leverage with other investors or you may have to combine the funds with a business loan. But that great possibility is worth the effort of truly knowing your business well enough for you to search for additional creative financing opportunities.
3. Confirm There Is a Need – If you’ve ever watched ABC’s hit show, Shark Tank, it never fails that one of the sharks, aka wealthy investors looking for entrepreneurial endeavors to invest in, always ask one of two questions when they believe a product may have potential:
“How much have you sold?”
“How much money have you made?”
They are simply trying to assess whether there is really a need for the product or service. You’ve gone to the trouble of taking an idea from conception to reality because you believed in it, but the proof is in whether or not you can get people you do not know to test the product out or more importantly, purchase it. Your market research will be key in this step. If you can’t get buy in from potential consumers, then there is a possibility that you don’t have the miraculous product you believed you had. And while we can talk about “how good an idea sounds” all day, if it doesn’t make dollars, it just won’t make sense to an investor, a banker or anyone else in a position to provide funding. . . . Which leads us to our next point . . .
4. Prove You Can Generate Steady Cash Flow – Remember, cash will always be king. It gives the potential financing entity a glimpse into your future of whether you will have the cash flow you need to pay creditors, employees and most importantly pay them back on time or at all for that matter. This is not the time to concern yourself with hiding income from the IRS. If you plan on applying for funding in the next 24 months, you’ll want to prove that you have the ability to make the most money possible. This means that you’ll need to keep accurate and clear financial statements, bank statements and yes, even tax returns. These documents make or break potential business loans daily. Think long term with your bookkeeping. Short-term thinking may prevent you from obtaining long-term sustainability.
5. Create and Implement Your Business Plan – It’s no secret; when searching for financing, the first statement you’ll hear has to do with drafting your business plan. What you rarely hear is that you not only need to have a written business plan, but that it should remain a “working” business plan that you can revisit quarterly to ensure it continues to mirror the business you want to create. A potential investor doesn’t want to blow the dust off of a plan you wrote two years ago when you first had the idea. Keep it current and keep it relevant so that the plan evolves as the business grows. The business plan should contain a forecast for your business with at least two scenarios: how you expect your business to perform if you don’t get any financing, and how it will perform if you do.