As an entrepreneur, getting substantial funding for your idea is one of the most important steps to your entrepreneurial success. It is not just about a good idea or passion. It also involves being able to convince someone else to believe in your idea enough to fund it. There are 5 things that lenders look at when they decide whether they will want to lend money to someone who is looking to start a business: Character, Cash Flow, Collateral, Capital and Conditions.
Investors and lenders look at the entrepreneur’s character. It can be agreed that most investors are looking for an experienced, invested and passionate entrepreneur that is capable of bringing their startup idea to new heights. Apart from the founder, investors might also consider the character and strengths of the rest of the team. Similarly, an experienced and capable management team would assure the investors of wise usage of the funds to elevate the business. Investors want to see the entrepreneur invest their own blood, sweat and tears into the business. If the entrepreneur is not willing to make a personal investment, why should they invest their money with them?
- Cash Flow
It is important to maintain a comfortable cushion between incoming and outgoing cash within the business. Lenders and investors will be closely monitoring the entrepreneur’s ability to not just cover the business’s daily expenses, but also surplus money to expand its operations. Investors would be looking at projects that can clear off their debt within a short amount of time. The more evidence of profitability that the business shows, the better.
A business’s capital includes everything from the financial plan of the business, to the cash flow, budget and the entrepreneur’s investment into the business. No one likes to lose money, so lenders are careful to only fund businesses that prove their ability to pay back their loans. A company with some funds on hand is a good sign that the business loan is not a desperate attempt at keeping a faltering company alive. It is also essential for the entrepreneur to come up with a practical plan and evidence of their ability to repay the loan.
Collateral is needed if the entrepreneur decides to secure funds through banks or other traditional lenders. Typical collaterals include valuable and tangible assets like real estate or capital equipment. Collaterals act as a safety net for investors to at least get back their capital investment should the business fails. This is why lenders are more likely to fund businesses with assets that can be easily sold. Entrepreneurs must be aware of the risk of losing what they put as collateral. Thus, It is advisable to put business assets as collaterals rather than personal assets.
Is the entrepreneur’s business plan in line with the current and future market trends to beat the competition? Investors and lenders are looking for projects that are in the right place and at the right time. External setbacks are likely to hinder the business’s profitability. For example, a typewriter company is flourishing. The company has an amazing team with character and good cashflows. However, the year is 1985 and the first computers are appearing on the market. Investors and lenders may not be comfortable funding this company as there seems to be a shift in the market that may hinder the business’s growth in the future.
In all 5 C’s of entrepreneurship, the underlying factor is the entrepreneur’s ability to pay back the loan. If you are an entrepreneur looking to start your own business or organization, remember that resources like these can help give you the tools and guidance you need to succeed. So keep on hustling!