SECURING FINANCING FOR NEW BUSINESS START-UPS OR FOR EXPANSIONS
Tips and Guidelines
(Those useful tips and guidelines are for business startups or for business expansions and not for large transactions.)
Are funds required for a new business or for an expansion plan? Have to accept that in most cases, and perhaps in all cases, "cold-hard cash" is needed to start or expand a new business, therefore, "First and Foremost" the new business concept must be a viable one, it has to attract investors' interest, the market and consumers should believe in you, believe on the concept and you need to have a good credit record.
The most successful entrepreneurs are the ones who think creatively, not only about their offering, but also about how to acquire cash and are fully committed to the success of their business.
To ensure success, all it takes is careful project planning, a sound business strategy, fully understanding your parameters (can you handle it? and how it will affect your life?) and ultimately, the right financing scheme that shall answer to the needs of the business. Accept that every business is different and presents unique challenges.
Where do the entrepreneurs get the needed cash?
- From the family wealth and affiliations?
- Peer-to-Peer lending? (specially for startups) -By selling an existing business or asset?
- From silent or active investor/s with or without an exit plan?
- From a financial investor with a defined exit plan?
- From a bank loan? (This may be the most complicated and difficult to obtain for startups as it involves collaterals, high interest rates etc.)
- Are there any other sources that the entrepreneur can get financing? Different situations calls for different plans........
Note that getting a bank loan approved is a tedious and complicated process. Lenders are increasingly looking into loan applications and are very strict in doing so. It is extremely important that you are ready to present the perfect complete package for in depth review if you hope to get it approved. Incomplete applications can cause unnecessary loan denials. There are important steps to follow to ensure your bank loan can be processed without complications; ask lots of questions on what is better for you and at the end you need to be aware of what kind of loan you are looking for. Look for terms you can reasonably afford and aim in paying off the loan as fast as possible. Also note that today lenders will rely on your past usage and repayment of credit.
Consider your financial limitations when planning for any loan. Apply for the loan based on your financial ability to make repayments you can afford. Loan officers have certain protocols for approving a loan and getting you the money and remember that the loan process can be a frustrating one.
Once those basic questions are answered, define how best the entrepreneur approach investors to secure the required funds can. As a guideline, here some basic tips to follow;
- Extensive research and ground work on the supply & demand situation of the underlying business is a must.
- Extremely important that the idea, concept, type of business and location are well thought through and clearly defined. Must address the ups and downs, and the risks involved.
- What are the business trends and how the competition is performing?
- Be realistic, do not inflate expectations and numbers; at same time don't be too cautious on what the new business can generate.
- Who is doing what? And who has the final responsibility?
- What are the start-up costs involved?
- Note that in some cases, hospitality related businesses are in general received with cautious and considered to be high-risk by the investors.
- Is your concept unique? And what sets it apart from other similar offers in the market?
- Any success story or failures to learn from?
- Is there a solid foundation and clear information-reason to attract and excite Investors?
The Business Plan;
- Develop clear and realistic assumptions (bases) covering all aspects and challenges that your business will be facing; market position, revenues, expenses, profitability etc...this must include: land & building, rent, strengths and weakness of the location, target clientele, anticipated spending patterns, assets, equipment, supplies, M&E-utilities, labor & work force (availability and costs), cost of sales, promotion & advertising etc....
- Keep the business plan short and to-the-point but cover all assumptions and aspects of doing such business.
- Draw up a comprehensive 5 (a must) or 10 years projections-plan as required.
- The plan is to be supported by cash-flow projections and positions.
- You must satisfy yourself and believe in it before presenting it to potential investors and be clear on what is the ROI-ROE etc....
- Ask yourself if the financials make sense.
- (Note: projections and cash-flow must reflect an adequate amount for pre-opening expenses plus initial working capital as normally new business will lose money during the first few months)
What you can, can't do and have to-do;
- Get advice from qualified professional firm/s that specializes on the sector. Note that the right advice is essential needed to the success.
- Consult with a legal advisor on where you stand and what have to do on the legal side and documentations.
- Understand what is required in terms of finance and be sure on the desired structure of the business, board composition and equity ownership.
- Understand tax and corporate finance ramifications on opening or expanding a business.
- What licenses, permits etc....you need and how to obtain all those.
Create investor's attention and interest;
- Accept that in principle, investors are skeptical but they also appreciate the potential of the concept-business;
- Be very clear on your vision and potentials.
- Avoid at all costs confusing the investors or hide from them.
- Remember that your strong personality is not sufficient to convince investors, you need to display faith on the concept, commitment, discipline and solid work ethic.
- It is essential to display your belief and your ability and charisma to succeed.
- Demonstrate a full and comprehensive understanding of what it will take for the business to succeed.
- Objective is to secure a win-win agreement.
- Compromise if necessary plus "give and take approach" and negotiate with patience.
- Be clear on how much equity you are prepared to give to investors.
- Minimum-maximum amount of investment (cash) required.
- Length and terms of the partnership.
- How many partners?
- Basic fundamentals you are not prepared to compromise on.
Fundamentals and deal breakers;
- Identify what are the deal breakers for both the entrepreneur (you) and for the investors.
- Shareholders structure and who controls what.
- Board composition, board meetings, topics to be discussed and what the board has to approve.
- Future funding of the Business in supporting growth with additional investment (bearing in mind investors' exit plan) -Provision of additional capital-cash if needed.
- Ability to transfer shares to 3rd party, right of first offer.
- Responsibility and systems of book-keeping and records.
- Distribution of profits-dividends.
- Costs of product maintenance & improvements (capital reserve).
- Timing and process and approvals of the exit strategy (if any).
- Annual operating budgets, preparation and approvals.
- Who runs the daily operation and has accountability?
- What is the role of the entrepreneur and what is the compensation?
Closing the deal;
- Ensure that all involved understands the concept, the structure, the potentials and the possible failures of the business.
- All involved to double check the numbers and projections.
- The official legal documentation is to be simple, to the point and understood plus signed by all.
- Stakeholders’ commitment and contribution to the success of the business.
- Clear time schedule on when cash is due, process and conditions.
- Controls and check and balance approach plus professional external auditing.
- Compliance with all legal laws requirements and tax planning.
Once in business, must apply all available skills on attracting and retaining loyal customers, provide value for money at all times, be innovative in your offerings and always shoot for market leadership in your field. Motivate your team and control your costs without impacting the quality of the product. Plus remember that managing cash flow becomes one of the most important role of the successful entrepreneur.
Maintain regular communication with shareholders on performance and on key business issues with objective to gain confidence and to prevent conflicts.