Investment Readiness - How to get yourself ‘Fit for Finance’
If you’re looking to start a business, or you’re already up and running, at some point you might need to look for funding. This is likely to involve a meeting with lenders or investors.
Before you approach investors you must be clear about the following:
•Why you need funding
•How much funding you need
•How you are going to raise it
There are a number of sources of finance, each designed to meet different needs and each with different pros and cons. Your business is most likely to gain funding through a combination of finance options, rather than a single source:
•Raising funds within your business – using your own assets, investments or savings.
•Approaching friends or family – they may be able to offer support.
•Bank finance – this includes loans and overdrafts. The lender will expect the loan to be repaid and there will be conditions applied to the loan.
•Equity finance - this is a way of raising share capital from external investors, such as business angels or venture capitalists, in return for handing over a share of the business.
•Joint ventures – pooling your resources and expertise with one or more other businesses to achieve a particular goal.
•Grants – applying for a grant, which provides a sum of money to an individual or business for a specific project or purpose.
Business Link’s website has a tool to help you decide which type of finance is best for your situation: visit the finance and grants section on www.businesslink.gov.uk for more information.
Once you have identified a need for external finance and decided which type of finance you’re going to pursue you need to make sure you’re ready to approach potential investors. You need to persuade them to invest in your business so you will need to be ‘investment ready’. This means understanding what the investors are looking for, and aligning the interests of your business as closely as possible with those of the potential investors.
2. Business Plan
Whatever type of investment you are seeking, you’ll be expected to have a business plan. It should be one of the most useful tools for helping you to manage your business and should provide a roadmap for your business development, whether you are starting up or already established. Your business plan should include:
•A description of your business
•Its plans and goals
•Strategies on to how to achieve them
•The market sector it’s in
•Any barriers and competition: this could be covered in a SWOT analysis
•Financial forecasts: profit and loss, sales and cashflow forecasts
•Details about the management team and their experience: management CVs
Sales, profit and loss and cashflow forecasting will help you assess the potential returns and the commercial viability of your business idea. If your business is already running, you will also need to provide the previous years’ accounts.
It’s important that you identify any potential risks and how you might overcome them as well as ensuring that you have contingency plans in place, so you could benefit by doing a SWOT analysis. That is: identify your business’s Strengths, Weaknesses, Opportunities and Threats. Once you recognise these, you can work out how to capitalise on your strengths, minimise weaknesses, make the most of opportunities and reduce the impact of threats. A good credit rating is important for businesses seeking finance. This can help you secure funds and also obtain good terms on trade credit. You need to be aware of your credit rating and take steps to maintain or improve it, such as keeping accurate records and information about your business and having good trading relationships with suppliers and customers.
3. Investors and their expectations
Lenders and investors can be individuals, banks or other organisations such as business angels or venture capitalists. You may also consider approaching grant providers who have money available in certain circumstances.
So what are lenders and investors looking for?
In the main, whether your lender is a bank, business angel, venture capitalist or a friend or family member, they’ll all be looking for the same things from your business:
•A strong management team.
•Good market knowledge.
•Ambitious but credible financials.
•A clearly-defined exit route that will deliver high returns.
Whether you are approaching banks or less formal lenders, such as family and friends, their primary concern will be whether or not you will meet your loan repayments. So make sure that you have an accurate idea of what your business is worth: if you’re not sure get an accountant to help you.
Lenders will want to know whether or not you can meet your loan repayments, above all else, so they will be very interested in the credit-worthiness of your business and your financial planning.
Business angels or venture capitalists (VCs)
Business angels tend to look for businesses in the early stage of development or expansion, or businesses within a particular sector that are looking to raise between £10,000 and £750,000.
Venture Capitalists typically invest in businesses with a proven track record, that are looking to raise a minimum of around £2 million, so they don’t generally consider start-ups. Both will be looking for businesses offering a product or service that offers a unique selling point or other competitive advantage. They’ll be very interested in the team that will be running the company - do they have the right skills and expertise to take the company forward and deliver strong returns? They will almost definitely require a share in the business and any dividends before agreeing to invest.
They’re looking to invest large sums of money: some have been known to say - ‘their children’s inheritance’ - so they’ll be interested in companies with large earning potential and a high return on their investment, probably within a specific timeframe. Investors in this category will be especially keen to know that there will be an exit opportunity and that they will be able to recover their investment and take any profits, so they will want to know what your long-term plans and goals are. They may place greater emphasis on the level of ambition inherent in the business when analysing your business plan.
Both business angels and VC’s are likely to be established entrepreneurs themselves and bring invaluable experience, specialist knowledge and contacts in their particular market sector to your business. It is worth doing your homework to find out the investor’s area of business and expertise as they can be more interested in companies operating or looking to start-up in a sector that they are familiar with.
Friends and Family
Investors such as family and friends might want a share in the business.
Grant providers will want to ensure your business is a worthwhile investment and that you meet their criteria and will be able to achieve your goals.
4. How to pitch to investors
Pitching your business idea can be a testing process and you need to be prepared for
difficult questions when meeting with potential investors.
You have to impress the investor: just having an idea for a business is not enough, so make sure that you know your business thoroughly and understand your market. Before you approach investors you should have your business plan ready and be able to explain your proposition. Practise your presentation and make sure that you know all the facts and figures inside out.
•Remember - Practice makes perfect.
•However, also remember that: “Practice does not make perfect. Only perfect practice makes perfect.” (Vince Lombardi) It's not the amount of time you spend practising that counts: it's what you put into the practice that really counts!
•Practise as if you are the worst, perform as if you are the best.
Know your business
If you struggle to explain yourself this may lead the investor to think that you underestimate their role, perhaps making them feel that their time, energy and funds are better used elsewhere.
You must be able to clearly describe:
•Your target market
•Your competitive edge
Know your numbers
You will have to explain how you’re going to spend the funds, as investors are not going to part with cash if they’re not comfortable about how it’s going to be spent. Showing a lack of knowledge, exaggerating, being evasive or even misinforming investors could ruin your chances of investment so be prepared to speak knowledgably and passionately about your business.
Your investors will also need to know that you have a good grasp of the commercial viability of the business, so make sure you know:
•Your selling price and product costs
•What your business is worth
How to pitch
Pitching to investors is going to be a testing process, but it doesn’t necessarily mean
that you’ll be mauled by dragons: but you do need to be prepared for difficult questions!
It is important that you can convince your investors that you know your numbers and
business inside out as well as demonstrating your commitment to your business: but you
also need to deliver a compelling pitch.
On the day you must:
•Look presentable and behave professionally from the word go as first impressions count.
•Have a clear, well-rehearsed presentation and be prepared for questions.
•Speak knowledgeably and passionately about your business and idea, but behave professionally.
•Stay polite and respectful throughout: by all means defend your business, but don’t be aggressive.
In your presentation explain your business proposition and why you think you can make a success of it:
•Be ambitious but realistic.
•Convince them that they should invest in your business.
•Know your margins, the selling price of the product and the costs, showing that you have a realistic grasp of potential returns and the commercial viability of the business.
•Let the investor know that you fully understand the terminology such as gross and net profit. Knowing your numbers is vital whether they’re actual or projected.
•Any investor will expect you to tell them about the expertise and the experience already within your business.
•They will want to see full commitment to the business by the management in terms of time and perhaps financial input.
•Outline your longer-term plans for the business.
Questions that investors are likely to ask are:
1. What type of products or services will your company provide? Give them a quick summary of your company.
2. Why would someone use these products or services? Establish an actual need for your services.
3. Who else is in the market and what distinguishes you from those businesses? Know your competitors: this shows that you’ve done your market research.
4. How will you compete in the market place? Highlight the factors that differentiate your business from the others.
5. Do you have any existing customers? Show that you are in touch with the market and what customers want.
6. How much capital are you looking for and what kind of return can they expect? Tell them how much investment you’re seeking in return for a percentage stake in the company and how you plan to invest it. Back this up with financial forecasts.
7. What kind of return can I expect and when? This can only be based on forecasts: be ambitious, but also be honest and realistic.
8. How much profit will your company make? If you're an existing company you will already have this information based on previous years’ accounts. If you’re projecting your profit, you need to base it on achievable sales forecasts.
9. How much money do you have invested in your venture? This demonstrates your commitment to the business and helps investors’ confidence.
10. What is your experience in this field? It's extremely important that show that you (and your management team) have relevant experience and a proven record in your industry. After all, you’re the one that’s expected to achieve the business goals.
11. What are the long term goals of the company? Investors will not only be interested in your goals for the business but also exit opportunities for themselves. You need to think about where the company will be in 5 years time, maybe even in 10 to 15 years.
12. How will you handle scaling up the business? Can you handle expansion? Do you have the resources?
13. Why are you approaching them?
Checklist: top tips when approaching investors
•Make sure you have all your documents together: business plan, accounts and forecasts, SWOT analysis and management CVs.
•Have a well-rehearsed presentation and be prepared for questions.
•Deliver a compelling pitch and be clear about your plans and goals.
•Know your numbers and explain how you plan to spend the money.
•Tell them about the expertise and experience within your business.
Whichever type of finance you apply for, you must have the required documentation ready, so ensure that you fill in the necessary application forms and have the relevant agreements drawn up. Some of the key things to include in a written agreement with an investor are:
•The nature and timing of return on the money – so how much the loan is for and whether the investor is going to get profits or a share in the business or both.
•A schedule or timed plan of dividend payments - including dates and amounts.
•Responsibilities - for an investor this should say whether they will have any active role in the running of the business.
•How any problems will be resolved.
If needed, a solicitor will be able to help draw up this agreement.
5. Where to get help
For further information on investment readiness:
•Phone Business Link on 08457 17 16 15.
•Visit the website www.businesslink.gov.uk where you can find guidance and tools to help you prepare your business plan and information on how to approach investors.
•Visit www.bookevents.org or telephone 0845 601 1000 for information on free workshops covering business planning and finance.
•Go to www.youtube.com/BusinessLinkGov to view videos on pitching for finance.