Financial Self Assessment
Securing funding for your business is about more than convincing lenders and investors to give you as much money as possible. You need to understand the specific capital requirements of your business and seek out the most appropriate sources and amounts of funding.
Additionally, you must be able to demonstrate that your business is capable of producing stable cash flow that will satisfy the expected returns of your sources of capital.
This requires you to conduct a detailed assessment of your business.
Questions to Ask Yourself
Lenders and investors essentially require the same thing. As you approach them, be sure you can answer these basic questions.
- How much money are you looking for?
Give an exact amount up front with no delay. A precise answer shows you are prepared and organized. - What will you do with the money?
List the equipment prices that you will pay, expenditures for research and development, anticipated growth in receivables or inventory, or old debts/salaries for additions to your sales force. - Why do you need the money?
Talk about how you are financing your entire business. Explain why you are seeking one type of funding over another. - How will this funding benefit your business?
Demonstrate how the funds will reduce costs, produce efficiencies, or increase capacities with new equipment or warehouse space. Show how marketing campaigns or viable new products emerging from research and development will accelerate sales growth. - How will you pay the lender back?
The winning answer is “…with excess cash flow from profitable operations”. An equity investor exits through a public sale of stock or the sale of your entire company. Show you understand this process. - When will you pay the lender back?
Use a cash flow projections to support the availability of future cash flow to repay the loans. Include principal and interest payments in the forecasts. Keep the terms within bank policy guidelines. Equity investors typically expect to see a targeted exit window of three to five years. - What happens if your plans do not work?
The lender counts on the personal guaranty of the owners plus business and personal collateral pledged to the loan. Use industry-specific information to prove the liquidation value of collateral.
What Lenders Look For
- Lenders need to know that their loan will be repaid. They are looking to take as little risk as possible.
- Businesses that show promise run by business people who have solid personal and businesses financials and are committed to the success of their business.
- Lenders will look at gross annual sales or revenues, checking account balances, profitability, and the length of time you have been a business.
- If your business is new, lenders will ask to see a business plan. This should include monthly cash flow projections for the first 24 months or 36 months for startups.
- A review of your personal credit history and your FICO score, focusing on:
- Personal credit card debt
- Personal loans
- Liquid assets
- Real estate holdings
- Tax returns
- Personal financial statements
- Lenders will pay close attention to your balance sheets.
