Questions Asked When Getting a Business Loan or Raising Business Capital
1. How Much Capital Do I Need?
This is the first question to formulate your plan to access capital or funding. Investors will ask this question, banks or lenders/funders will ask this question. This is the the most basic question they gonna ask. How much do you really need also needs to take into account of your own living expenses, at least for a full whole year if you're starting up a new business. Don’t expect to make immediate profit from day one of your business. Yes, it’s possible but always very unlikely. If you are already operating a business then this question should return an answer that's is more likely an exact number, preferably not a guesswork. I was once being asked this question by an investor when I prepare my business for IPO, I gave a range $3mil to $5mil, and the investor drilled me further questioning how am I gonna use it differently if it's $3mil or $4mil or $5mil. My "not so exact" answer frustrates him and I remember vividly he told me off in the face. "you will fail if you don't have an answer" that's the last words before the meeting concluded.
2. What is the purpose of the funding?
As per above scenario, I was thrown the question of how I would use the fund. So this is another very important question. The purpose of your funding and how you plan to use them (hopefully wisely) are of critical factors to make or break the financing deal. Your plan needs to be clear and concise. I made the error of being vague, that's telling the people who has the money that I am not well-planned. And it hurts me even till this day when I recalled how disappointed the investor was when I couldn't formulate the right answer and plan. Think of this carefully before you head into a meeting with funder. If possible, have a detailed breakdown of your planned use of funds.
3. Are You Being Realistic?
Starting a business or executing a business plan requires optimism as this would be required when the going gets tough. Entrepreneurs or business operators generally are optimistic people as this attitude is necessary if their business is to be launched off the ground. However, the problem arises when their business expectations are far from the reality in the business world. Being realistic entails proper planning and putting into consideration all factors that may influence the growth of your business positively or negatively. Your plan should identify, quantify or estimate the capital that your business may require before it reaches the break-even point. A business plan when thoroughly questioned would either challenge you to think critically or research when you are in doubts. Remember; when you finally get willing investors or lenders, you will be answering some of these tough questions as lenders and investors evaluate businesses by the quality and comprehensiveness of their business plan. This echoes my point above of a carefully planned use of funds.
4. What Is the Value of My Company?
Valuations determine cost when equity additions need to be input into the capital structure. For example, supposing a business has its valuation placed at $5 million and has no incurred debt seeks a capital of $6 million dollars; the business would be valued at $11 million after investment (post-cash valuation). Each contributing party would own the business, depending on their percentage contribution to the capital.
Valuations always consider:
Current worth of company
The amount of time needed to create future value
If success is attainable.
It is advisable you understand the tools employed in valuations as this would help you get better valuations and retain the higher percentage of ownership when you eventually get funding.
5. Who are the interested parties?
You must understand the risks and profits associated with your potential investors be it private, professional or family investors. A variety of funding options, in addition to self-funding, business incubators, and government grants may be available for you to choose from. Seek your professional accountant advice for tax planning, tax breaks or even various possible government grants. When borrowing, the cost of borrowing is usually deductible and this needs to be taken into account of when structuring a complex loans deal. And more often than not a lot of business operators overlooked the effect of carry over tax loss from previous years (if you're not a start up and has been around for years).
6. What Are My Legal Responsibilities to Potential Investors?
Generally, business owners seeking funds from lenders or investors are required to provide forms and specific factual information in understandable language to potential lenders or investors so that they have the ability to evaluate the investment and determine whether it is right for them. Seeking and paying for competent legal advice when soliciting, negotiating, or contracting with investors or lenders is mandatory for prudent business owners. Also, employing the services of a solicitor's may not secure advantages for you on the upside but a solicitor’s value in eliminating the possibilities of fraud charges, confusion about the agreements reached, or avoiding future legal problems is something you should consider if you are seeking to borrow for your business or raise capital through other sources beyond your personal savings or investments. Remember, independent legal advice can be your best investment, do not overlooked this.
For more information about accessing business funding please email email@example.com or visit www.n1holdings.com.au