Lenders are used to help entrepreneurs and organisations provide the capital, advice and even strategic partnerships they need to bring their initiatives to life.
When determining how to seek out lending, first be aware that there are broadly two streams of finance available to entrepreneurs – debt financing or equity financing.
Typically associated with banks or private financing firms (or even family and friends), debt financing is a loan at a set interest rate that is to be paid in full over an agreed term.
Equity financing via angel investors or venture capitalists (or again friends and family), is in effect an exchange of the portion of the venture for cash. In this arrangement the investor takes on significant risk and the repayment is associated with the relative success of the business.
Equity financing is much less of an “arm’s length” arrangement.
As a result, the perspectives of these lending groups are vastly different.
While both are seeking to capitalise and secure a profit as a result of lending against the business the debt financier has simply a predetermined financial result in mind.
Therefore the criteria to secure funding is based on a consistent formula:
– Past performance of the entrepreneur;
– A fundamentally sound business plan with a 12, 24 and 36 month supporting operational plan;
– A clean credit record;
– Demonstrated history of debt repayment;
– Expertise within the venture area;
– Accumulation of other assets which may act as collateral against the loan.
Equity financiers seek not only to have a safe investment and a return on the investment, but to be aligned and supporting a business which adds value to theirs. In this way it is important that any business plan or proposal to seek financing clearly outlines the venture’s core goals, objectives and core values.
In this way the lender in effect becomes a business partner in the venture and may provide access to a range of stakeholders and opportunities unreachable otherwise. This alliance also adds credibility to the venture.
Conversely, entrepreneurs should ensure the integrity of their venture is retained and that the model, ethics and values of the financier do not negatively impact on their start-up.
Venture capitalists seek:
– Superior businesses;
– Quality and depth of management;
– Corporate governance and structure;
– Appropriate investment structure;
– An exit plan.
For any venture seeking finance the overarching lesson is to have developed detailed:
– Feasibility studies;
– Business plans;
– Operational plans.
The articulated planning should help determine which is the best-placed financier to secure the future of the venture.
Preparation is key to demonstrate professionalism and commitment.
For debt financing, ensure all documentation is presented in support of a detailed application. References are also recommended.
To secure equity financing it is critical not only to ensure detailed information regarding the proposed business as outlined above. It is also important to have a detailed understanding of the financier, their business goals, past investments and their outcomes and the issues of the day. Demonstrating alignments of the proposed venture to the financier is a component of the value proposition.