Before approaching investors make sure you have prepared a business plan. A sound and well-structured business plan will clarify key issues helping you choose the right funding option. It also shows investors you understand your current financial position, maps your plans for the future and sets out your case for investment.
The plan should include:
- financial information such as cash flow and profit forecasts
- your financial structure, for example types of debt.
In making your case, banks and other investors are likely to consider your:
- character and business track record, including your credit history
- personal capability, business skills and experience, including whether you have the skills to take your business to the next level
- business capability and qualities to succeed, including good staff and systems
- commitment to the business, particularly your own capital
- plans for the money and how much you want. Investors like to see market research results, assessments of the competition and market testing of your products and services, track record of success, protection of intellectual property (IP)
- ability to repay. You should be prepared to show financial projections, including your repayments schedule. The bank will be looking to see you’re not overstretching your business’s ability to service the loan.
- security. The bank will be looking for marketable assets such as buildings that they can sell if things go wrong. The asset must be free of encumbrances such as restrictions under that Resource Management Act that might reduce its market value.
Appropriate finance - structure
Banks and other lenders will look at the financial makeup of your business to judge whether the way you are financing your business is appropriate. They will consider:
- is a loan appropriate for the purpose?
- is a loan the most effective and cost-efficient way of financing your business?
- how does your business compare to similar ones?
Your level of debt (gearing)
They will also look at your level of gearing. Too much in relation to your assets will diminish your chances of getting finance. This may also worry your suppliers who could reduce your credit terms.
Banks and other lenders may also impose terms and conditions on the financing it extends. For instance you may not get all the financing at once, but may only get an advance and have to meet certain performance criteria before they advance more.
