Sometimes a business needs a cash injection. Whether it’s for upgrading equipment or premises, or just a bridging loan to help with a short-term cashflow problem, there are times when you have to go cap in hand for funds.
However, asking for money and demonstrating an ability to repay it can be stressful and time-consuming – and a distraction from the day-to-day running of the business that you’re seeking funds for. How should you approach it to avoid the possible pitfalls and minimise the anxiety?
Any pitch for a loan or investment is going to come under serious scrutiny. No one is handing out free money here. This is one job that you want to get right first time, because banks – along with venture capitalists and angel investors – deal with thousands of pitches each year, but only invest in a fraction.
Essentially, you are trying to demonstrate that your business has a solid history and a bright future. Start by drawing up a checklist to make sure you have the right paperwork and information to hand. This can include previous loans and debts, financial statements, legal documents and contracts, business insurance, details of collateral, and last, but not least, your business plan. If the plan needs a polish, think about the market, as well as your USP, growth strategy and experience.
Peter Hale, CEO and founder of business startup resource Teneric, has prepared more than 500 individual plans, and more than 250,000 entrepreneurs have used the planning tools on the company’s website. Hale says the most common mistake people make is with the numbers. In short, their figures often just don’t add up.
“I always tell people to watch some old episodes of Dragons’ Den. What usually happens is that the contestants get their sums wrong or they’re too ambitious. The Dragons pick at the numbers – simple stuff like the top and bottom line – and they can’t give them an answer. If they do, they can’t explain how they’re going to get there.”
Hale emphasises the importance of being realistic about your projections, so you can give a solid timeframe for the repayments. “Investors deal with so many people every day,” he says. “They aren’t interested in woolly ideas, poor numeracy and uncommitted people. They want to see a skillset and adaptability. Even with microbusinesses, they want to see whether the owner has the ability to cover a lot of areas.”
Remember, you are likely to be grilled on the details even if you’re asking for a modest amount. After all, a bank’s job is to assess risk, and investors want to know when they will make a return. They will take a dim view if you can’t justify your figures or they are erroneous. Hale stresses that the same rules of diligence apply, even if your pitch isn’t face to face. “You may be writing a pitch and sending it online, but you are going to have to justify it at some point – you’re not using an ATM.”
Another key element of a pitch that frequently falls short is the executive summary. It’s the production’s opening number and has to be spot on. The ability to explain, in a few sentences, your product – and the impact it will have on the market – is surprisingly difficult. One way to help boil it down to its essence is to read it out loud and test it on friends who have no prior knowledge of your business. “The executive summary is your elevator pitch and it had better be good,” says Hale. “By the end your investor will likely already have a ‘yes’ or ‘no’ in their minds.”
Another area to concentrate on is your team. How good are they? What are their backgrounds? How committed are they? Even if you’re a one-person operation, try to highlight the loyalty and proficiency of any third parties you regularly work with, such as suppliers, distributors and, above all, customers. After all, it’s the people who buy your products or services who feed your financials. Try to build a case for why your customers will either provide you with a lasting business relationship or recommend you to others.
It’s also important to research your investor and consider the sort of investment you need, says Hale. “There are many different types of institutions you can approach, but they will have different motivations and different rates, which you will have to factor in to your financial plan.”
Finally, put some thought into whether you are prepared to give up a stake in your business in return for the loan. “Be prepared to be asked for equity or a place on the board,” says Hale. “It may be the best thing because you’ll get advice and support. If you’re at a crossroads and you need to scale up, then you need support. It could cost you 20% or even 50% of your business, but what’s half of £10m compared with half of nothing?”
Not everyone’s pitch is successful. It’s a highly competitive environment and money is the hardest thing to extract. However, that doesn’t mean your time has been wasted or you will never raise the funds. The key to a failed pitch is to learn from it.
“I always say that if you get rejected, ask why,” says Hale. “Learn from the reply and don’t take it personally. Ask if you can change it. And would it make a difference if you went away and rethought it? Even be prepared to revise the concept. If this is your dream, your passion, then keep knocking on doors.”
Whatever your business, don’t keep knocking essential tasks to the bottom of your to-do list.
Tailor your business insurance with AXA. It couldn’t be simpler. That’s one less thing to worry about, and more time to spend getting on with business. Get a quote online today.
