Securing business financing requires more than just a great idea. There’s a lot of risk involved when starting a new business, so lenders and investors are cautious about funding startups. Thus, in order to obtain business financing, you must work hard to address the concerns of potential backers. Here are the dos and don’ts to maximize your appeal and to avoid common mistakes when looking for financing.
Present a Realistic Valuation and Business Plan
You might think (no, you know) you have a billion dollar business on your hands. But unless you have an extremely clear, well reasoned, scalable business plan with a lot of experience to back up your assertions, most funders will see a high valuation as naive and foolish. Very few startups see instant success, and it could take over a decade before seeing a return on an investment.
“Not being realistic about the financial situation of your startup from the beginning shows a lack of understanding and frankly maturity, in regards to your ability to lead a company,” says Worthworm co-founder Paul Jackson. Seek advice from experienced investors and entrepreneurs to develop a defendable valuation.
Reach Out to Banks for Funding
Most banks will help promising entrepreneurs put together the best business plan possible to get business financing. You might have to turn to the US Small Business Administration or regional and community banks, but they are definitely worth considering.
As long as you are as transparent as possible with your past experiences and current business needs, your banker will tell you the exact information she or he needs to present your “best case” to the bank’s credit committee, says BIDaWIZ CEO and CPA Ryan Himmel.
Get Term Insurance to Secure Business Financing
To get a bank loan, banks will often require you have term insurance. Term insurance is a life insurance policy that covers a specific period of time (“term”). Brian Greenberg, President and Founder of True Blue Insurance, says that by obtaining term insurance, business owners can use it to secure small business loans or construction loans whenever necessary.
Seek Out Strategic Financial Investors
You might be hesitant to obtain business financing from angel investors or venture capital funds. But even though you’ll have to relinquish some equity, it might pay off in the long run.
“These financial investors are generally very helpful,” says Himmel. “They offer industry expertise and a strong network of contacts which will allow you to grow internally, as well as having the opportunity to form strategic partnerships with larger companies.”
Underutilize the leadership team
Potential funders aren’t just financing you and your talents. They are financing your entire business and the leadership team charged with running it. And if you don’t know how to assemble and make the best use of your team, funders won’t feel confident you know how to grow your company.
Make sure to fully vet and prep your management team, says Jackson. Ask them about past successes and failures so that you know if their experiences add value to your company. That way, you can convince potential investors that you and your team are ready to tackle all the obstacles that come with running a business.
Lack a Specific Marketing Strategy
Potential funders need to be able to see precisely where your product or service fits in the current marketplace. Without a specific marketing plan that clearly spells out how you will reach your target market and scale your business over time, it will be very difficult to secure business financing, says Jackson.
“Having a clear go-to market strategy that demonstrates the potential for your company’s sustainable competitive advantage is of the utmost importance to an investor,” he says.
By following these guidelines, you’ll set yourself up for a greater chance of funding your business needs. Contact an UpCounsel business attorney to help you secure your business financing.