Raising business finance can often be one of the most challenging things an entrepreneur has to do. A Silicon Valley entrepreneur was recently quoted as saying he believes an entrepreneur should pitch 30 venture capital firms; they should expect to get 3 offers; and then they should go and negotiate further before picking the best. This is a gruelling process if you decide to follow it, with a 90% failure rate!
You should take on board the comments of those that knock you back, but you shouldn’t assume that everyone will feel the same about your idea and your business plan. Obviously you have to believe in your idea, but it is also possible that you will have to adapt your business plan to cater for investor appetite, market dynamics and / or a range of other factors.
Following are some of the ways that you could finance your business, and get your plan off to a flying start.
Raising money from a bank is hard when you are getting started. This is especially the case if you have not injected a decent amount of equity. Other factors such as experience and the competence of management will also play a part into how safe the bank considers its investment. If the banks refuse, consider approaching family and friends to see if they are able to offer a loan – although there are many downsides to this approach, it’s sometimes the only way to get your business plan moving forwards.
It’s definitely easier to get a loan when your company has a stronger balance sheet. Bankers will often talk about the leverage that a business has. This refers to the ratio of equity to loans that your company uses to finance their business. The lower the ratio, the better your creditworthiness, and the more likely a banker will be to offer a decent loan at a better interest rate.
When you leverage up your business more, you are more likely to be able to increase earnings per share, however you also make your business less stable. Your mind may be torn between equity dilution, growth and stability. Keep in mind, slow and steady doesn’t always win the race. Entrepreneurialism is all about accepting a degree of measured risk; you have to decide how much you’re willing to take to reach your goals.
It’s sometimes easier to raise equity finance, as a small business, than it is to go to the bank. This is especially the case if you will be investing in intangibles, or an IP-heavy business. Don’t be scared to hand over a percentage of your business if you believe that it will enable you to grow that much faster.
Although there are investors who are willing to look at companies in all sectors and at all stages in their growth cycle, you’re more likely to get a favourable valuation if:
You have a unique idea, a protected idea, or you are likely to benefit from a first movers advantage. Your drive, passion, flair and expertise are all extremely important factors too.
The more progress you have shown, in terms of sales and product development, the more favourable your potential investors will be towards your proposal. Anybody can make a business plan but if you already starting to turn it into reality then you will show that you have what it takes to grow the business further.
Financials are important too. The stronger the balance sheet, the greater the cash flow, the more profitable your company is now – the better. However, earning potential will also play a role in the investors mind.
You have to be prepared for getting plenty of rejection if you want to succeed. If you are determined and persevere long enough you will find an investor.