Many young leaders do not necessarily come from a financial management background. Most firm heads have been steeped in sales and marketing where they perceive the action is, but the financial side requires just as much attention, perhaps more so in the early going.
Searching for funding sources start with friends, family, and business partners, but eventually one must approach external entities. These must be convinced that their money will be returned at a profit and that all possible risks are being mitigated.
If there is a common mistake made by new business owners, it is that they severely underestimate the amount of time required to curry favor with prospective lenders and investors. Applying for a simple small business loan for a company like Accutemp from your local banker may be easily achievable if you have good collateral in the form of liquid assets or home equity, but if you are just scraping by and hoping that the bank will make a loan based on your business prospects, you may be in for an unexpected surprise. Banks rarely make unsecured loans or invest in new business ideas. They expect others to fill this need.
The “others” have changed materially over the past decade. The biggest change on the scene is that private lenders are bypassing banks and dealing directly with their prospective customers. The Internet has become the best “tool” for searching out these small business loan lenders, typically private groups of investors that are willing to take more risk than your local banker. Many of these firms have quick turnaround times, but they will expect to verify the presence of adequate cash flows to pay back their loans.
What if material cash flows have not materialized at this time? Your banker will be quick to tell you that you need outside investment capital to shore up your balance sheet and provide working capital for the road ahead. He will also have contacts in the local market to help you access private investors or local development agencies that will facilitate the process. Time and preparation, however, are the keys to opening any of these doors. Expect four to six months of effort, assuming that you do have good financial reports and a sales track record that reflects step-wise growth and predictable profit margins.
Having a glitzy marketing set of powerpoint slides will not suffice. You will never deal directly with so-called “deep-pocket” investors. The opportunity may present itself to review your plans with their appointed agents, who will be especially demanding from a numbers and due diligence perspective, asking more questions and for more detailed financial analyses than you would ever expect. Such is the nature of this process. You must convince the “guard” at the door of your potential to go any further.
What are the expectations of these “agents”? Put simply, they want to see that your marketing “story” matches up with your financial results to date. Both “stories” must correlate well before trust is given. Yes, customers and business partners are important, but if your numbers are suspect or difficult to explain, then all bets are off. Here are a few pointers to address:
- Cash-based financial statements must be re-stated on a full accrual, GAAP basis. Audited statements are preferred in most cases, especially if you have been at it for a few years. Three years of history and five years of projections are a minimum.
- You must be able to measure your market size and growth rate with supporting external statistics, along with competitors and their respective market shares. Investors want to know that your potential for growth is real and not just a dream.
- You must also have a detailed sales pipeline that supports your projections for future growth.
Investment-ready materials take time to prepare, but they can prove the difference when trying to open today’s doors of opportunity. Invest the time early for best results.
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