We have written a couple of articles in the past about the expectations of lenders, investors, or even the government when it comes to financing or grants, but this is an area that seems to be the most misunderstood and where we receive many calls. This question comes up the most in respect to those starting businesses which in many cases just have an idea and have not started a business and are pre-revenue.
Having a Sound and Defined Business Strategy There tends to be a misunderstanding of those who are looking to start a business of what is required by a lender, investor, or grant provider to gain an understanding of your business. In all cases, a full business plan is required that documents the detail of your business in every area to a level that shows you have thought through your business and can demonstrate them in the plan how you got to the numbers and how you intend to execute on the plan and generate the revenue that is projected.
Having a business strategy is the responsibility of the owner(s) in the business. 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 being unless are willing to pay for the consulting required to help you develop your business strategy. Developing your business strategy is not part of a business plan development engagement, it is expected that as the business owner that you have this already developed.
For not having a developed business, a start-up will pay 25-50% more than a mature business for having a business plan developed. In 7 years, we have had only two start-ups who could answer the questions we provided about their business to develop a business plan. If you cannot tell us the information and convince us how are going to generate revenue, how are you going to convince a bank, Investor, or the government to give you funding?
Having Skin in the Game There is a misconception by many who are thinking about starting a business that there is a large pot of gold out there waiting for them to access for them to start a business primarily 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 taking risks there is no true gain. There is never a time that starting a business is safe. You have to invest in your own business. Whether that is taking out a loan against your personal assets, using your RRSPs, or 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 would they invest in your business if they do not see that you even believe in your business enough to invest and take the risk with them.
A true entrepreneur works for “free” until the business is making money and all other expenses are paid. You will not have anyone give you financing or investment or a grant to cover your salary. If you need to get paid, then you need to go 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 RRSP’s, severance, or other sources of money to cover their personal expenses until such time their business can pay them. Why Banks, Investors, and the Government Lend or Provide Grants Banks and Investors (whether public or private) are businesses themselves and indirectly so is the Government as they all are looking for a return on their investment. They are not providing money to businesses in “hope” of seeing a return. They are going to provide 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 their money and the interest. The risk level may differ by the bank and what industries they shy away from, but if you are a start-up without any history of revenue, the same metrics are being evaluated. Your personal assets will also be assessed. Next, they will look at why you need the money. They are only really going to look at assets or anything that is 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 your payments based on your personal assets and business plan. Banks will follow up to make sure you are executing on the plan as outlined, especially if you are late with any payments.
Investors invest in companies that they believe they will make 2-3 times return on their investment. They want to be out of your business with that return typically within a maximum of a five-year period. They are taking a risk on you and your business, and in many cases, their expertise and contacts will be the reason that they get their money back as well as make you money. 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 really to give up – they are the ones 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 business as well as 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 provide grants in the North due to 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 lenders look at as well. If you are lucky enough to receive a grant, your business will be monitored to ensure that you followed through with the plan as 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 in place to execute on the business strategy?Do the financials make sense based off 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 personal credit rating of the business owner and what personal assets do they possess?What are you using the financing to fund the business? Is the majority assets and if not do you have personal credit they can attach to cover the loan payments?If this is an existing business, what are your breakeven point, quick and debt to equity ratios? Also, what working capital do you have available?
Summary If you are starting a business and are going to need some level of financing, it is important to understand what is required before approaching someone to write a business plan, which you believe will be the key to getting the money you need. You have to have developed your business and be able to articulate every area of your business. It is not the consultant’s job to develop your business.
You also have to be committed and show that you are investing in your business along with understanding 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, as it does neither the client or 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 there has been a level of due diligence. 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 have a business plan developed. We have had potential business owners argue with us about not agreeing to do their plan, but it would hurt our reputation and would not help them if we had taken their money knowing that there was not a chance of receiving financing due to the fact the idea has not been developed enough to be a viable business.