3 Signs That Your Business is Ready For Funding
If you are a fan of popular TV shows like KCB Lion’s Den, Shark Tank or Dragons Den, then I am sure you are familiar with the uphill task that entrepreneurs face when seeking capital for their businesses.
It is very apparent from these shows that having a good idea is not enough to attract funding or capital. There are a number of factors that are at play and if you miss the mark on any of them, you may miss out on a funding opportunity.
If you are thinking of seeking external funding for your business, then this Article may be just what you need. It focuses on criteria that may be used to assess a business’ potential for attracting external funding.
Reasons for Funding
Businesses require funding for a myriad of reasons. Startups usually require funding to get operations off the ground i.e. to fund product development, product distribution and to cater for operating costs like office expenses, staff costs, etc. On the other hand, high growth or mature businesses seek capital for some of the reasons listed below.
- expansion into new markets
- meeting working capital requirements
- financing asset purchases
- funding research, development and innovation
Sources of Funding
There are two broad categories of sources for business funding: internal and external sources. Internal sources include a founder’s’ own/pooled savings or in the case of existing businesses, profits and reserve earnings. The list below indicates some common sources of external funding.
- Loans from family and friends
- Loans from financial or governmental institutions
- Angel Investors
- Private Equity
- Venture Capital
External funds are often granted with strings attached. In other words, there are conditions that the borrower must meet prior to and after receiving funds from the investor. Investors typically set these conditions after conducting due diligence on the prospective business. The signs listed in the next section of this Article are indicative of the things that investors consider prior to making an investment decision.
The 3 Signs Your Business is Funding Ready
1. Proven Product, Proven Demand
To attract investors or financiers to a business, one should be able to demonstrate an ability to deliver product(s) that serve an identifiable consumer need. The traditional way of doing this is through a well-defined business plan and model. Such a model typically sets out the (i) current and future target market analysis; (ii) competitive landscape; (iii) product-fit in market; (iv) historical sales analysis; and (iv) 1-3 years projected future performance.
Another way to convince investors of product viability is by developing and releasing a Minimum Viable Product (MVP) to the market. This involves releasing a product with basic minimum features to gauge potential customer’s interest. As the market takes on the product, the entrepreneur gains insights on its demand and functionality and uses the same to enhance the product. At the same time, investors can rely on the MVP insights when making funding decisions.
Although MVP method can be deployed by an firm, it is most popular in tech-based companies. Global tech giants such as Uber and Dropbox are often credited for using MVP to pique investor interest.
2. Collateral and Repayment Capacity
Loan collateral or security comes into play where a firm is seeking to debt finance. It refers to any assets that a business or its owner can pledge to a financier for the life of the loan. Common forms of collateral include real property, inventory, invoices, cash savings or deposit, personal guarantees, business equipment, etc.
Lenders require collateral to protect themselves in the event that the business is unable to repay the debt. As a result, they go to great lengths to determine the sufficiency of the collateral provided. This includes appointing independent valuers to determine the value of the collateral and assessing current and projected business performance.
To increase the chances of obtaining a substantial loan amount, it is advisable to provide collateral that is much higher in value than the requested loan amount. The main reason for this is that lenders hardly ever disburse loans that are of equal value to the amount of collateral requested. Instead, due to factors such as asset depreciation and security realisation risks, they apply only a certain percentage of the value of the asset as the security value.
Besides collateral, consistent performance in terms of revenues and profitability also increase a firm’s appeal to potential lenders as it shows that the firm will have the capacity to comfortably make loan repayments.
3. Solid Leadership Team
Investors are interested in the leadership capabilities within a firm because they want assurance that the business can thrive beyond its founder(s). In other words, having a qualified management/leadership team assures investors of business continuity and that the founder has adequate support to deliver the organisational goals. Similarly, a business that has leaders who have shared vision and values, wide networks and demonstrated abilities in developing and executing business strategy is considered to be bankable.
One Last Thing
Fulfilling the requirements discussed above is not an assurance that your business will get funding. Ultimately investors want to be certain that investing in your business translates to good value for money. Thus, as a business owner, you should devote time to gearing up the attractiveness of your business on all fronts i.e. products, profitability, people and investments that can be used as collateral.
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