What do lenders and investors look at before signing a check over to a business? Banks want to know if you'll be able to repay the loan, private investors want to know if they're going to profit, and venture capitalists want to know if your concept will solve a recognized, widespread problem.
Not that many start-ups have to answer questions from venture capital firms. "Most [venture capitalists] focus only on two kinds of deals: medical and high-tech," says Richard Quis, director of marketing and communications for PricewaterhouseCoopers LLP.
That leaves banks and investors. While banks are usually conservative when it comes to business loans--particularly to start-ups--more and more are lending to small businesses. "[Some banks] will make 60 percent to 80 percent loans if the entrepreneur contributes the other 40 percent to 20 percent of the equity," says Quis. "However, they discount your assets knowing that if ownership of the business reverts to them, they'll probably have to discount the value by 40 percent, and they don't want to suffer a loss." Such funding from banks, though, is almost exclusively limited to businesses with tangible assets or substantial receivables.
What about private investors? "They want to know you have enough working capital to see you through a potentially long, dry start-up period, and a business plan showing how and why you'll produce sufficient working capital and profits thereafter," Quis says.
"Be prepared with market studies supporting your concept," he adds. "But such studies should be conducted by an outside firm. And if you're going into a retail location, don't touch the deal without input from a site-selection expert. Then get the report in writing and present it to potential investors."
In your search for funds, Quis suggests, "Keep in mind, investors' interests are the same as yours: You both want a profitable operation. So provide a marketing survey, location study, demographic analysis--whatever it takes--and stress your expertise in the business. That's a major consideration among investors and lenders alike."
Paul DeCeglie is a former staff reporter for Journal of Commerce and American Banker. He can be reached at MrWritePDC@aol.com