Appeal: Nothing Sells Like Success

Every small business owner is convinced that the enterprise will be successful and that investors can be persuaded by these convictions. However, to obtain financing, you will need to provide objective evidence that your business will succeed.

On the most basic level, every potential lender or investor evaluates a business by looking at how the injection of cash will be used and how the money will either be repaid or result in a profitable return. Many of these questions may be answered by data contained in your business's financial statements and projections; however, lenders and investors also make more subjective evaluations of you and your company. These assessments may affect your financing requests even more than the objective numbers.

Additional evidence of future success for your business can sometimes take the form of contract commitments from existing or prospective customers, industry or professional opinions, and market research even if it's informal testimonials. In your business plan or loan application, make sure to note any advantageous market trends, consumer appeal, management experience, retention of skilled employees, and availability of any special resources, e.g., a valuable patent.

Identifying a lender whose strategic approach or special industry focus matches your business will also enhance the subjective appeal of your business.

When you make your case that your business is a worthy investment, keep in mind that most lenders and investors are followers, not leaders, and the best evidence of a good investment will be your prior success in raising capital.

A financier wants to spread risk as much as possible, and a certain comfort level may be reached if other investors have a significant vested economic interest in your business. If you can show a strong financial commitment to the business from additional investors, as well as a meaningful personal investment by the business owners, the appeal of your company will correspondingly increase.

 
Did You Know?

As a rough rule of thumb, most lenders will expect owners to have an equity investment of at least 25 percent of the total cost of establishing the business.

Your past business experiences, your expertise, and your managerial skills likewise play a crucial factor in determining the appeal of your business. If you can establish a personal relationship with a particular financier, such as a local community banker, your past successes and business experience are more apt to be considered in determining the likely future success of your business. Use your personal resume, as well as letters of reference from community professionals and business persons, to help project yourself as a reputable, reliable, and creative business person.

 
Tip

Work Smart

With a startup business, you may want to consider structuring your financing plan, including plans for new equity investments, in distinct stages. Inevitably, a small business will appear more attractive to investors at different times during its infancy. By projecting different financing phases in your business plan, you can often present a more appealing and realistic financing scheme to investors. For instance, making early-bird equity available at a price that is scheduled to increase upon a specified event, i.e., final approval of a pending patent or securing a certain business location, may induce investors to act now rather than wait.