What is it that a lender or investor is looking for in your business plan? This is probably the most frequently asked question that I get from my clients who are seeking funds to start or expand their businesses.
Lets look at the key issues that are usually targeted by most lenders and investors.
1. Cash Flow: When it comes to lenders and investors, I always like to address cash flow first because that is really what a business is all about. I have frequently been told that the pro forma cash flow statement is about 93% of the ball game. What the lender or investor wants to know is that you can maintain a positive cash flow (cash on hand) while you repay financing and interest. In the case of a venture capitalist whom becomes an equity partner, you will also need to show how you can generate an acceptable profit over a period of time.
2. Collateral: What assets do you have and what are you willing to risk for the success of your business? (cash, business assets, home, property, vehicles, etc.) Collateral represents your commitment to your company and removes some of the risk on the part of the lender or investor.
3. Credit History: It only stands to reason that your credit history is an excellent risk indicator. If your credit reports are poor and there have been no significant indications that your status has improved, the lenders or investors have no reason to think that you will do any better when you are operating on their money.
4. Character: There has been a trend by some traditional lenders to issue “character loans” —generally for smaller loan amounts. This has been in response to the SBA’s support to increase the number of small businesses. This practice is not common, however, because the lenders’ businesses depend on maintaining a low default rate. They are, after all, the caretakers of their investors’ money.
5. Current Business vs. New Business: It is true that current businesses with a successful financial history will have an easier time than start-ups when it comes to getting financing. A new idea is great, but lender or investor’s comfort zone is greater when there is a profitable history upon which to base the decision.
There are, of course, other factors, that have a great deal of bearing on whether you are successful in your search for capital. Current trends have to show that there is a demand for your product or service — and your marketing plan will have to show that you have the ability to reach your target market.
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Linda Pinson is the author of the best-selling book, Anatomy of a Business Plan
mail to: lpinson@business-plan.com
www.business-plan.com