By far, the most common question we receive at BizPro is a simple “How do I get my business started?” or “How do I get money for my business?” While these seem to be the most basic, obvious questions anyone could ask, you’d be surprised just how many people forget to. The answer is quite simple: prove, beyond a doubt, to anyone with sufficient cash that your idea/company model will function, survive, and profit. That’s it! Maybe the simplicity and vagueness of the answer is what drives many entrepreneurs to loose sight of that most important part of planning a new business; how will it get started? In order to successfully communicate your proof to any lender or investor, it would help to understand what they consider to be valid “proof”. While the possibilities here are virtually endless, there are at least five main items any lender is sure to evaluate. Be sure they’re in your plan!
High FivesThe most important piece to obtaining any funds is your business plan. Consider it your company’s resume and understand it must be perfect. Much like a potential employer will look harshly at any mistakes on your personal resume (as you should have put your absolute best effort into that first impression), investors should be equally picky about every detail of your company’s. In addition to the “what my business is & how it works” and other business specific criteria, the top five items lenders and investors are likely to focus on while evaluating a business proposal are as follows:
1. Credit: Though you won’t be listing your credit score in your business plan, if you intend on obtaining a business loan to finance your business your credit is probably the single most important factor in determining your eligibility. While larger or more established companies may be evaluated based on the credit history of the business itself, your personal credit history will be the basis for the decision when starting up. If you are seeking VC or other private investment, a current profit and loss statement will be a common document requested for credit/debt evaluations. At any rate, find out what your credit looks like well before approaching a bank/investor and solve any issues it may have.
2. Investment Amount/Term/Use: How much money do you need? This is an important factor in determining where to look for money and if you’ll get it. A typical small business loan is made for around $30,000 and many banks empower their loan officers to lend up to $50,000 without a board review. On the other hand, most VC firms aren’t interested in anything smaller than $1 million so be sure you’re looking in the right place. Over what term do you propose to repay the loan/investment? While you won’t get much leeway in picking this at the bank (typically 10 and 20 year lines of credit are the most common options), private investment may hinge on how quickly you can repay the investment. For what will the loan/investment be used and how will it affect the earning potential of the company? Proposing to use the funds to pad your salary is a sure way to hear a laughing “no” from any lender. Using funds for continued development, operating expenses, or expansion to cover the lead-time before such operations produce new revenue, however, is a “good” use of funds.
3. Operating History: If available, the past is always a good indicator of the future and the past performance of your company will be a good indicator of how viable it may be. Even if you have run your “company” only as a part-time, “on the side” job, or hobby in the past, document your past experiences to show how you’ve grown, increased profits, etc We’re assuming, of course, that you wouldn’t be trying to get money for a business that you weren’t growing or improving with. If it’s a brand new idea/company compare it with similar businesses currently operating.
4.Personal Qualifications: So many times people forget that their company is literally nothing without the people who run it. Be sure that your plan sells you and your co-workers as well as it does your business. When dealing with a new company any investor realizes it’s the people, not the business that they are initially investing in. You need to prove (by tangible examples) that you or your co-founder(s) are capable of running your company.
5. Revenue Model: How does your company make money? Is it logical? Is it feasible? While the fancy spreadsheet with all of the impressive numbers and estimates, your cash flow model, will show how much is made and from what source, you need to tell the potential investor how & why it makes that money with words. Don’t rely on a bunch of numbers to do the talking for you.
KISS & Tell
OK, you’ve spent months on research, pre-writing, and making sure you have a clear explanation for those important parts of the plan. It’s time to KISS & Tell. That is, “Keep – It – Simple – Stupid”, and tell them what you know. With all of the information a prepared entrepreneur has running around in his/her head its sometimes tempting to just let it all out in hopes of wowing a potential investor/lender. Don’t! While it’s important to thoroughly describe your business and its operations, don’t get so deep into the details that it’s not plainly obvious how your company functions and profits. Many for-hire plan writers want you to think that your business plan is some massively complex beast so they can “tame” it for you for a price. But remember, to an investor (the business plan has additional use for you), it only needs to accurately describe how your company will function, survive, and profit. More pages don’t always mean better either. Get your point across and invite further questions from potential lenders/investors, if they’re interested in more information, they’ll ask.
Slippery fingers
While the points that should be hammering down now are “make sure you have the key elements in your plan” and “keep it simple”, I can’t help but digress to another, related topic slippery fingers. It seems, in my experience, that far too many entrepreneurs have mistaken “gross” for “net”. Several times I’ve mentioned, “make a profit” and I feel it necessary to clarify that to mean “net profit”. A cash flow forecast showing millions of dollars running through it isn’t going to impress any potential lender when the bottom line is blushing. I call this a company with “slippery fingers”lots of money coming in, but it just can’t hang on to any of it. The point here is, focus on what you can actually keep, not how wide your spreadsheet columns have to be.
Scott Karch, author of BizPros plan writing manual, is a six-year veteran of writing successful business plans and finding capital for new businesses. He currently serves as BizPros President and as a loan officer for Main Street Mortgage, which provides both residential and commercial financing. As an Honorary Co-Chairman to the National Small Business Advisory Council, Scott was recently named the Kentucky Businessman of the Year. You may contact Scott at scott@1bizpro.com or by visiting the BizPro website at http://www.bizplansonline.com.
