Preparing Your Business for Funding: Essential Steps for Entrepreneurs

Preparing Your Business for Funding: Essential Steps for Entrepreneurs
Dave Oetken, Center Director

Finding funding for your business is often a make-or-break moment for entrepreneurs and small business owners alike. It can provide the capital needed to bring a brilliant idea to market, scale operations, and achieve sustainable growth. However, before approaching investors or lenders, it's crucial to lay a solid foundation that truly demonstrates the viability and potential of your business venture. By taking the necessary preparatory steps, you can increase your chances of success and present a compelling case that resonates with potential funding sources.

The first step in this process is to start with you as the entrepreneur and leader of the business by taking an honest assessment of what resources and assets you have to contribute to the project.  Banks and investors don’t want to be the only one that has money at risk in the venture. They want to know what you are putting in the deal whether it’s cash, assets, or maybe even sweat equity. 

Banks and investors will also want to know if you are good with money.  A bank will request your credit report and perhaps even a background check to get a sense of how you have handled your personal finances in the past. A credit report gives banks an indication as to how you’ll handle money in the future by looking at your credit history.  Often, an entrepreneur’s credit score may have taken a hit in the past for reasons that were beyond their control. Or, as is often the case, there are serious mistakes in your credit report.  This is why it is important to review your credit report as it gives you a chance of credit repair or, more importantly, the opportunity to explain to the lender the issues and what you are doing about them before they pull your credit, and you are faced with what may be some uncomfortable questioning.  Being aware of any issues, you may have the chance to mitigate the issue or at least explain why it happened will definitely change the tone of any conversation with funders.  Always make the first critical step to check your credit before applying for any funding so you know what the lender will see.

Keeping good records is important in any business and it’s just as important to maintain good personal financial records. If you’re a bit disorganized, now is the time to get everything sorted out.  A bank or other financial institution will want copies of your personal tax returns for the last three years as well as a personal financial statement and since you will need to get this stuff in order, get started before you apply.

What else do banks want?   If you review and understand the “6 C’s of Credit” you’ll know!  The 6 C’s are Character, Capacity, Capital, Collateral, Conditions, and most importantly, Cash Flow. Let’s look at each individually:

·       Character - reflects the borrower's reputation, honesty, and commitment to meeting their financial obligations. Lenders will review the borrower's past behavior, including their credit history, employment stability, and any legal or financial issues, to gauge their trustworthiness and reliability in repaying debts.

·       Capacity - refers to the borrower's financial ability to make the required loan payments based on their current and projected income sources. Lenders will analyze the borrower's cash flow, existing debt obligations, and overall financial situation to determine if they have sufficient means to service the new debt without becoming overly burdened.

·       Capital - is the borrower's financial resources and assets that could be used as collateral or liquidated to repay the debt if necessary. Borrowers with substantial capital, such as cash reserves, investments, or valuable property, are typically viewed as lower risk by lenders.

·       Collateral -  is any tangible asset or property that the borrower pledges as security for the loan. If the borrower defaults, the lender can seize and sell the collateral to recover the outstanding debt. The more valuable and liquid the collateral, the more secure the loan becomes for the lender, as it provides a fallback option.

·       Conditions -  refer to the purpose of the loan and the economic environment that could impact the borrower's ability to repay. Lenders will consider factors like the borrower's industry, market trends, and the overall economic climate to evaluate the potential risks and opportunities surrounding the loan request.

·       Cash Flow -  is the most important “C” of them all.  Unless the business can generate enough cash flow to cover its obligations, then the business will be less likely to sustain itself over the long term.   Cash flow is what pays the bills, and gets the bank repaid.

Banks and investors will want to know all about your venture and the way you communicate that information is through your business plan. Whether you are launching a startup or embarking on growing your existing business, one of the most critical components in this process is developing a comprehensive business plan. This document serves as a roadmap, outlining your unique value proposition, target market, competitive landscape, operational strategies, and financial projections. A well-crafted business plan not only showcases your understanding of the industry but also your ability to execute a cohesive vision. According to CB Insights, a lack of a solid business plan is one of the top 20 reasons startups fail, underscoring its significance.

Finally, once you've laid the groundwork, it's time to craft a compelling pitch that will captivate potential investors or lenders. Your pitch should clearly articulate your unique value proposition and competitive advantages, outline your growth strategy and potential for scalability, highlight your team's expertise and achievements, address potential risks and mitigation strategies, and present a clear and realistic path to profitability and return on investment. A well-crafted pitch can make the difference between securing the funding you need and missing out on a crucial opportunity.

By taking these essential steps – developing a comprehensive business plan, establishing a strong financial foundation, protecting your intellectual property, building a strong team, gaining traction and validating your idea, and preparing a compelling pitch – you'll not only increase your chances of securing funding but also demonstrate your commitment, preparedness, and potential for long-term success. Remember, attracting investors or lenders is a process, and the more diligent you are in laying the groundwork, the stronger your case will be.