Updated: Aug 25, 2022
There tends to be a misunderstanding of those looking to start a business about what is required by a lender, Investor, or grant provider to give you money. In all cases, a business plan that documents your business details or a feasibility study which determines the company's risk is required. In either case, you need to show how you got to the numbers, and they support the plan. The plan type required will depend on the institution or individual providing the financing. You will need to check with them before proceeding.
Having a Sound and Defined Business Strategy
Developing your business strategy is not part of a business plan development engagement. Having a business strategy is the responsibility of the owner(s) in the business. As the business owner, you are expected to have this already developed before requesting a business plan be developed. If you have not defined your business strategy and understood all areas of your business, you will not be able to get a business plan developed. The exception is if you are willing to pay for the consulting required to help you build your business strategy.
In 7 years, we have had only a handful of start-ups who could answer the questions we provided about their business to develop a business plan. Not having created a business strategy prior, a start-up will pay 25-50% more than a mature business for developing a business plan. If you cannot tell us the information and tell us how to generate revenue, how will you convince a bank, Investor, or the Government to give you funding?
Even with a feasibility study, you need to have thought through your business and know the market you are entering.
Having Skin in the Game
There is a misconception about starting a business that there is a large pot of gold out there for those starting businesses from banks and the Government. Starting a business is a risk, but it is your risk and your choice and no one made you choose this path. A true entrepreneur takes risks because without risks, there is no actual gain. There is never a time when starting a business is a safe bet.
You have to invest in your own business. The investment can include:
Take out a loan against your personal assets (house, car, cottage).
Using your RRSPs.
Even using an inheritance from Uncle Bob.
No one will give you any funding if you have not invested yourself. You need to ask yourself why others would invest if you do not believe enough to invest and take the risk with them.
A true entrepreneur works for "free" until the business makes money and all other expenses are paid, such as payroll and HST. You will not have anyone give you financing, investment, or a grant to cover your salary. If you need to get paid, you need to work for someone else who can provide you with a salary. We have clients who have not taken wages for years to reinvest in their business. They have used that "skin in the game" such as their RRSPs, severance, or other sources of money to cover their personal expenses until their business can pay them.
Why Banks, Investors, and the Government Lend or Provide Grants
Banks, Investors, and Grant providers (whether public or private) are indirectly businesses; as such, they all are looking for a return on their investment. They are not providing money to businesses in the "hope" of seeing a return. They are going to give the money to those where they see the lowest risk and the greatest return.
Banks make money from the interest you pay on the loan they give you. If your business fails, they lose the money and the interest. The risk level may differ by the bank and what industries they shy away from, but the same metrics are being evaluated if you are a start-up without any revenue history. They will also assess your personal assets.
Next, they will look at why you need the money. Banks are only looking at assets or anything tangible that they see will aid in generating revenue, such as marketing. They will cover a percentage of the assets and the marketing if they feel you can make payments based on your personal assets and business plan. Banks will follow up to ensure you are executing the plan as outlined, especially if you are late with any payments.
Investors invest in companies they believe will make 2-3 times the return on their investment. They usually want to be out of your business with that return within five years. They are taking a risk on you and your business; in many cases, their expertise and contacts will be the reason they get their money back. For that privilege, you must give up a portion of your business. If you default on your payments, you could have your business taken from you. If you are not earning any money, there is nothing to give up – the investors are taking a leap of faith in your products, services & you. If you have not generated revenue from your business, your business is worth close to $0.00. They will look at your investment in the company and the potential, but if you can find an investor pre-revenue, do not be surprised if you are not the majority shareholder. The days of high-tech ideas worth millions pre-revenue are few and far between.
The Government provides grants to improve economic development and employment. The grants they provide have a purpose, whether provincial or federal. There are grants for manufacturing, as there is a goal of getting manufacturing back in Canada. They are grants for employees and training to help people get hired and trained so they do not end up on unemployment. They assist in the North due to the high unemployment rate and closure of businesses to stimulate the economy. The money is not available to give away. They are providing grants for a purpose, so they are looking at the same risks banks and investors look at too. If you are lucky enough to receive a grant, the Government will monitor your business to ensure that you follow the plan outlined.
What Are They All Looking For?
There are many criteria that all three look for when they are determining whether your business will be approved:
Is your business strategy defendable?
Do you have the right skills to execute the business strategy?
Do the financials make sense based on the go-to-market strategy and marketing plan?
Does the business owner have experience in running a business or experience in the industry in which they are starting a business?
What percentage of the financing is coming directly from the business owner?
What is the business owner's credit rating, and what personal assets do they possess?
How are you using the financing to fund the business?
Is the majority of financing going toward assets?
If not, do you have personal credit they can attach to cover the loan payments?
If you are starting a business, you will most likely need some level of financing. Understanding what is required before approaching someone to write a business plan is essential, which is key to getting the money you need. It is not the consultant's job to develop and define your business.
You also have to be committed, show that you are investing in your business, and understand what someone will cover with financing. Those providing funding will not cover salaries or items that they cannot attach in some way to reduce the risk.
Having a business plan written does not ensure you will receive funding, and no one can promise you this as there are too many factors, including your credit. We always qualify a client fully before proceeding with a business plan. It does neither the client nor us any favour if we do not believe they will be approved for financing. Our company and individual names are on every plan, which adds credibility and assures the one providing funding that there has been a level of due diligence, as one of our partners is a CPA.
If we do not feel your business is bankable, we will tell you right up front and tell you what you need to do before approaching anyone to develop a business plan. We have had potential business owners argue with us about not agreeing to do their plan. Still, it would hurt our reputation and would not help them if we had taken their money, knowing that they didn't have a chance of receiving financing due to not having a defined viable business.
If you need help developing your business strategy, this can be accomplished through business coaching. Determine whether as a start-up if your lender will require a full business plan or whether you can get by with a feasibility study.