Four Factors to Secure Successful Financing
What you need to know to impress investors and lenders
You have an opportunity to purchase an old, but classic, 10-room boutique hotel that is about to go into foreclosure. But there’s something missing. Could it be the cash?
You have a small business you want to start or an existing business you want to grow; yet you need an injection of money to take you to that next level. You call a few people as potential investors, but how do you persuade them to invest in you and your business?
You need OPM
Raising capital, also known as OPM—Other People’s Money, is a must-do in the world of investing. It’s also one of the most intimidating parts of starting out as an investor.
So it always helps to have a little guidance along the way. In my experience, there are four key issues to know and address before you go out asking for capital. If you can clearly and confidently address each of these four issues, then the odds of securing funding are in your favor.
What is the project the lender or investor is providing you capital for? If it’s for your business, then what exactly is your business? What makes your business unique from others in your industry? And what is the advantage your business has that will build confidence in the investor that it will be successful?
If you are raising money for an investment, then what exactly is the investment, and what makes this investment so attractive that I should place my money in this one versus another investment?
It’s easy to tell a prospective investor all the good things about a project. It speaks volumes when you explain the negatives of the project as well—and how you plan to overcome them.
Keep it simple. Keep it concise. Keep it real.
Who are the key partners behind the project? Who is putting the deal together? What is the track record of the partners? What experience do they have?
Put yourself in the investor’s shoes. For example, whose music project would you more likely invest in—Paul McCartney’s or Mike Tyson’s? Would you put your money behind Oprah Winfrey or Lindsey Lohan to launch a chain of private entrepreneurship schools?
It’s not rocket science. It’s common business sense. What experience do the partners bring to the table and, as an investor, am I comfortable with their level of expertise?
Show me the real numbers. This is obviously a bit trickier for a new start-up company since most of the revenue numbers will be projected, not actual historical numbers. This is where previous experience can overcome that obstacle. Show the investor, as accurately as you can, how the project, be it a business or an investment, will make money.
How are you going to use the money being raised? What are the funds being allocated to?
One hint: If it’s ever suggested that some of the money raised will be used to pay a salary to the owner of the business or the finder of the deal, then my door is closed. If you want a paycheck, go get a job.
And of course, you must answer these two key questions for your potential investor:
How soon will I get my initial investment back?
What is the return on my money?
The bottom line is this: Are your financing structure and terms attractive to an investor?
Investors want to know who is running the day-to-day operations. This is key to the ongoing success of any venture. Just as we looked at the partners, what is the experience level of the management team? Who are they? What’s their background? What makes them vital to the success of this project or business? How do they react under pressure?
If you are starting your own business or if you’re raising money to grow your existing business, then the partners and the management team may be the same people. That’s not a problem if the investors feel confident in the experience and expertise of the team.