6 mistakes business owners make when asking for finance – and how to avoid them

As we head into 2017, personal New Year’s resolutions are in abundance.

Best intentions of making that gym membership actually pay for itself for once and sticking to the diet and making a firm commitment to not buying the brownie when you pick up your morning coffee. Many of us look at the New Year as a time for change.

And as a business, you may feel that 2017 is the year when you take your business to new heights and make it fly.

Unless Santa was extremely generous and left you the gift of a money tree planted at the bottom of your garden, it’s likely that you’ll need to obtain finance from somewhere.

There are a number of common mistakes that businesses often make when it comes to obtaining finance.

Here’s the most common ones, and how to avoid them.

Mistake 1: Having a business that’s not scalable.

An investor is unlikely to consider funding a business model that doesn’t have significant growth potential. Put the boot on your own foot, would you hand over your cash to someone if they didn’t prove to you beyond doubt, that they had both the ability and a sound plan to scale their business into a large profitable enterprise?

Not only do you need to show that you can expand your client base, but you stand far more chance of getting an investors backing if you can demonstrate that you have everything in place from a scalable perspective from manufacturing, distribution, customer service and management capability.

Think of your expanding business as a jigsaw puzzle, the more pieces you have in place, the clearer the picture; the more chance you have of obtaining funding with the least impact on your own equity stake. 

Mistake 2: Making the wrong decision on the type of financing you need.

As we know, in this day and age, funding is available from a variety of sources, not just a traditional loan from the bank manager. Peer 2 Peer lending, crowd-funding, private investment, grants, sponsorships, and strategic partnerships are all out there for the taking.

However with so many options available to you, it’s imperative that you do your homework and choose the right type of financing at the right time based on your needs and growth strategy. It’s worth looking for the financing options with the lowest cost of capital that would allow you to retain the greatest amount of equity.

The only time you might want to reconsider this being your main criteria, is if you felt that what was on offer from the investment team in terms of expertise, may actually be worth losing a little more equity to get them on board.

Mistake 3: Over valuing your business.

If you’ve ever sat through an episode (any episode!) of Dragons Den, you’ll know that one of the biggest mistakes based on the Dragons responses that business owners end to make, is that they over value their business.

How often to we hear them say with an almost arrogant confident swagger…. “I want £75,000 for 10 percent of my company” while the Dragons are looking on with a sense of disbelief.

To be fair, the equity stake offering has usually followed a pitch where the numbers aren’t necessarily quite as they seem on paper. If you’re serious at wanting investment, do yourself a favour, know how much your business is truly worth before approaching investors.

Mistake 4: Running a marathon before you can confidently walk a mile.

Don’t make the mistake of asking for money too soon. It’s possible that you’ll be unprepared and any valuation will be based on the profits the company is making at that time so make sure that you’re in the best place you can be.

Investors will factor in any pending order commitments, distribution deals that you have in place and signed agreements that can give them a sense of your company’s future earnings potential.

Give yourself the best chance on this; if you are showing a profit before you seek significant funding, you can prove to investors that your concept is viable. Being prepared is vital to give you a greater leverage in your negotiations to obtain a better valuation and allow you to keep more equity.

Mistake 5: Not giving an exit exit strategy option for investors.

When was the last time you asked for something without thinking of what you might offer in return? We ask someone to look after the dog while we’re away, as we hand over the lead and bag of treats we offer to return the favour when they go away. We ask a friend to drop us at the airport to catch a flight and offer without question to re-pay the help. When looking for finance you need to ask yourself “What’s in it for them?”.

Investors aren’t handing over their money out of the goodness of their hearts, they want a return. You can increase your chances of receiving funding if you have a clear plan for how investors will recoup and profit from their investment in your business.

This exit strategy is vital. It might include royalties on sales, arranging new financing options that would allow you or another investor to buy them out once the business reaches a certain stage, dividends or distributions based on profits or selling stock through an initial or direct public offering.

Mistake 6: Going it alone.

We all need help and advice in life from raising children to buying a house. Setting up and then subsequently running a successful business that has a strategy to grow is no different, especially when you’re reliant on someone else’s money to achieve that goal.

Unless you are a marketing, sales, IT and finance guru, it’s unlikely that you’ll be able to achieve this goal alone. Look to others for knowledge and experience to help you work through the issues and gain a better understanding to iron out the creases.

So if 2017 is going to be your year for business expansion, make sure you have everything in place. Losing money by not making the most of your gym membership is one thing. Not being able to get finance for your growing business because you were ill prepared is a whole different ball game.

Find out how Matt Haycox can help you fund your business expansion at matt-haycox.com

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