Eight Considerations Investors Look At When Deciding Whether Or Not To Fund Your Small Business
Before someone decides to provide financing for your small business, he or she will want to assess the likelihood of your success. Investors want to avoid excessive risk and put their dollars where they stand to gain financially. As they evaluate the opportunity to fund your business, they’ll consider a number of details and characteristics. The more prepared you are to demonstrate the feasibility of your business idea and your capabilities as a business owner, the better your chances of convincing investors to put their confidence in you.
Among the many considerations that may go into an investor’s “yes” or “no” decision to fund your business are:
Business plan–As an outline of your goals and how you intend to achieve them, a business plan serves as the roadmap for your business. A well-thought-out, well-researched business plan shows you have done your due diligence and are taking your venture seriously.
Business model–Your business model is the framework of how your business will operate. It serves to provide a view into how your company will generate revenue and make a profit. Prospective investors will want to ensure it seems sustainable and agile to last long term. Business models often include various assumptions about your business including activities your business will engage in, revenue sources, sales channels, customer base, business resources (such as property, website, customer lists, etc.), suppliers/vendors, value proposition, cost structures, and more.
Gross margin–This is the difference between your revenue and your cost of goods sold. It’s represented as the percent of total sales revenue after your direct costs for producing your products or services. Gross margin is a much better indicator of whether or not a business has staying power than looking at revenue alone. What’s deemed healthy varies from industry to industry, so investors will take that into account when considering your business’s gross margin.
Strength of your brand–If you have an established business, investors will also consider the viability of your brand. Is it well known to your target market and how much of that target market has it penetrated? Is it easy to differentiate from your competition?
Sales funnel–Investors will also want to know what opportunities to generate the income you have in your sales funnel. Not only will the quantity make an impression, but investors will also have an interest in the quality of those prospects.
Personal and business credit history–If these are in good order, it will reflect more favorably on your sense of responsibility and accountability in the eyes of investors.
Professional valuation–With a third party providing an expert estimation of what your company is worth, you’ll have an unbiased appraisal to share with investors.
In addition to what we’ve mentioned here, other factors might also influence an investor’s decision. The key to a successful pitch is to put the time and effort required to research, plan, and prepare. For guidance and feedback as you work through the process, contact your local SCORE chapter to talk with a small business mentor. Mentoring is free of charge. With knowledge about and experience in all aspects of operating small businesses in diverse industries, SCORE mentors can serve as valuable resources as you start and grow your company.
Southwest Regional Vice President, SCORE
Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 10,000 volunteer business mentors in over 300 chapters serve their communities through entrepreneur education dedicated to the formation, growth, and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit SCORE atwww.score.org.