Don’t Get Stumped by Investors or Lenders
January 22, 2015
Small business owners, many times, need outside funding for startup expenses, working capital, or expansion. Whether interested in equity financing (from investors) or debt financing (from lenders), the "money person" will ask basic questions and want definite answers before finalizing a transaction.
Rather than being caught by surprise or tongue-tied with answers, study the following questions and prepare your responses beforehand.
1. What are the gross profit margins or expected gross profit margins on your various products or services?
Different products and services contribute different amounts of gross profit to a business. You should know not only the dollar amounts but also the percentage of gross profit margin that each produces. When these figures are known, you'll know where to place emphasis on what will be most beneficial for your business. Investors and lenders want to know you're on the right path to success!
2. How much equity and debt is there in your business and the percentage of each?
Investors and lenders want to know how much ‘skin in the game’ an owner has in the business. This basically means how much of the business is being financed with equity (owner’s money) or debt (borrowed money). If a business is not doing well and the owner stands to lose very little money, an owner can easily walk away from the business. Be upfront with how much you've invested in the business and entice others to come along with you!
3. Who is your competition, and why are you different and better?
“Know your competition better than you know your own business” is a great business principle, but small business owners seeking investors or lenders also have to know their own businesses inside-and-out in order to make logical comparisons. Do a critical self-evaluation of your business utilizing a SWOT analysis. This is a great way to visualize and understand the strengths, weaknesses, opportunities and threats (SWOT) that exist in your business. With this knowledge, you're better able to compare your business with the competition...and then beat them!
4. How much cash are you burning through each month?
Investors and lenders want to know how much cash is going to be burned each month before your business becomes cash flow positive. If you don't prepare a cash flow budget, you won't be able to answer this question. Go a step further, however, and tell the "money person" that you not only know the answer to this question, but you also prepare a monthly budget variance report. This will demonstrate your understanding of the differences between your business' actual and predicted results. When this comes out, the "money person" will know you're on top of your financial game!
5. How are you going to use my investment or loan?
Money can be used in a variety of ways in a business. Make sure you know how the proceeds will be used...working capital, equipment, marketing campaign, inventory, expansion, etc., and how these additional funds will allow your business to grow and succeed. These are much better answers than using the proceeds to draw a high salary!
6. How are you marketing your product or service now, and what changes do you see in the future?
Marketing decisions will change as your business goes through its various organizational life cycles...formation to later growth. Marketing plans that worked during the initial startup or product rollout will need to be revised as your business matures. Be prepared to describe your strategic plan to an investor or lender with special emphasis on marketing. Without a solid marketing plan, a company simply operates from day-to-day without a real direction for the future. Obtain requested funding with your vision for the future that includes making effective use of every marketing dollar. This is a recipe for securing money...and success!