How To Prepare For Financing
Failing fast is great, but it’s important to put your best foot forward, which means focusing on healthy forward progress. When preparing to access business financing neither you or your banker, want large amounts of work to end without getting approved by the loan committee. Reserve a few hours each week to ensure the way you’re operating increases your ability to access funding in the future! Here are three ways to help increase your chances of receiving business financing:
Are You Creating Value In A Market That Is Growing?
When pitching your business for financing you need to have a story to go with the numbers. It’s tempting to throw down your proformas and expect a bank to be able to understand your business, but pitching your business is communicating the story of your business. Especially if there’s little to no historical data on the performance of your business, it’s up to you to convince them that the business is less risky than the average enterprise when it comes to repaying a bank’s principal with interest.
- Use specific examples of instances when your unique ability and prior experience have resulted in wins for the business.
- Use market research that applies to your first 3-5 years in business. Get creative in figuring out the share of the market you can realistically capture during the course of the loan.
- National trends don’t cut it. Try calling similar ventures in others states, look for patterns in their feedback and advice, and then contextualize for your own business.
- Have a logical explanation ready for every assumption you’ve made in your business model. You might want to spend a day focused solely on identifying all of your assumptions.
Get Out Of The Idea Stage
Do you have traction and validation? Congratulations, you’re already at an advantage over other businesses! It is surprising how many people are out peddling ideas to banks with no validation. If you have not quit your day job, and you are about to ask for a million dollars for your business that has only been a dream on paper for the past year, definitely hit pause!
If you’re not using the first version of your product to earn as much validation as possible, it could turn into a red flag for potential funders. Who would you lend money? Company A with an idea, Company B with an untested product that already cost them $100k, or Company C with $15k into a prototype that has already been completely redesigned once or twice based on customer feedback?
Pitching your business is communicating the story of your business.
Having trouble figuring out how to do this with little to no funds? Then consider different and creative approaches to test your ideas. Arrange coffee meetings with folks who think differently than you. Read “Creative Confidence” by Tom and David Kelley. Launch a bare bones product to a few customers letting them know how much you value their feedback.
What can your business sell, or launch, starting today? The difference between pre-revenue and a little bit of revenue is reassurance, for yourself, and a requirement for funders. Again, business sales signal the ability to transition from idea phase to reality. There’s a bit of fear and trepidation in the subconscious of every entrepreneur, and those first few sales do wonders to soothe those anxieties.
Sales also signal a step towards a more mature product. The more mature your product is, the less risk you’re asking someone else to assume. In the beginning, when funds are tight, it can be tempting to pursue quick dollars from high-interest lenders. If you’re experiencing rapid growth organically, do you even need a loan? In theory, delaying the use of outside funds should result in access to larger amounts of capital at better terms down the road. Consider a smaller loan to build credit until capital becomes essential for growth.
Anticipate Questions
Public speaking is still up there on the list of America’s top fears. Don’t meet with a bank or funders until you practice your “pitch” with another human being. You’ll see a tremendous improvement from your first practice pitch to your fifth. Find friends and family to practice your pitch with. Make changes and repitch to the same people, then repeat with a new batch. In addition to a confidence boost, they’ll naturally ask probing questions about the business just like a loan officer would.
Make sure you present to at least two other business owners as well. Take a business owner out for a lunch meeting where you’ll be asking for their feedback. They’ve likely “been there done that,” and will be able to provide great insights based on their journey, and/or the information you include in your pitch. Consider adding great business owners to your informal advisor pool. Go into some of these conversations thinking about a longer-term mutually beneficial relationship.
A few more tips on improving your self-presentation:
1). Ask others what they see as your greatest strengths and incorporate that information into your pitch; 2). Is your tone and verbiage positive or arrogant (there’s a fine line, err towards positive and confident); 3). Does the manner in which you hustle reflect the value proposition of the business; 4). Are you organized enough to respond to all of the key requests for information without major delays?
Be sure to manage your expectations. This will help with the endurance you’ll need to complete this race! The commercial financing process can be an emotional roller coaster. Plan on having to spend several hours a week, for a few months, before you receive your first approval.
There are other financing options that might be interested in helping you, especially ones that are more “pitch” oriented. CDFI’s and mission-focused lenders have access to unique loan pools that are more focused on impact than significant financial return. The local SBDC should be able to connect you with these type of lenders. The idea is to find an alternative product like our Growth Loan or a character based Kiva loan. These sources are extremely useful when looking for working capital, or needing to finance things like marketing and website expenses.
