There are multiple options for funding a startup, and most entrepreneurs would agree that none of them are easy. Fortunately, careful preparation can make the process less painful. Here are five steps you should take before you begin your search for seed money.
Improve your personal credit score
Get your personal finances in order. Whether your funds come through loans or investment, you’ll need evidence of how you handle money. As a startup, you won’t have an actual profit and loss statement (P&L) to prove your financial intelligence and organizational skills. Your personal credit history will fill that information void.
Raising your credit score takes time, so put it at the top of your fundraising to-do list. Your goal, according to financial guru Suze Orman, is not a good credit score, but a great one — think 740 or higher. An outstanding credit number will be a clear illustration of your determination to live up to your financial obligations. And, there’s an upside here: Having your own financial house in order will give you one less thing to worry about as you take on the stress of launching a new business.
Have a killer plan
Preparing a solid business plan is time-consuming, detailed work. The fact that you’ve made the effort to produce one will speak volumes to potential lenders and investors. Besides clarifying your goals, a business plan will help determine how much capital you need and how quickly you can repay — two key pieces of information any lender will require.
Having a plan makes good business sense. According to research by Professor Andrew Burke, of the Cranfield School of Management, a well-written business plan can improve a venture’s growth by an average of 30%. He advises focusing your plan on adaptability, sustainability and the exploitation of opportunity in your target market.
[Read:The Definitive Guide to Writing a Startup Business Plan.]
Potential funders want to hear all about your big idea.
Focus on financials
Potential funders want to hear all about your big idea. They want to feel your energy, see your work ethic and share your vision for the future. Above all, they want to know you’re going to pay them back or make them money. The best way to demonstrate that your head is in the right place is not with words, but with numbers — financial details.
Venture capitalist Richard Harroch suggests preparing financial projections for at least three years. He considers your anticipated P&L and balance sheet to be more important than a bulky business plan. Draw up detailed assumptions about expenses, margins, overhead and product development costs. All of this is aimed at testing the viability of your business plan before you pitch your first investor or fill out that initial loan application.
[Read: How to Create an Accurate and Reliable Profit and Loss Statement.]
Know your financing options
From bootstrapping and crowdfunding to incubators and angel investors, the list of possible funding options is long and varied. Thoroughly researching each of them requires time and patience; but identifying the right one can greatly affect your startup’s chances.
Martin Zwilling, CEO of Startup Professionals, warns that there is no magic money out there — it always comes with strings. Every funding decision, he says, is a complex tradeoff between near-term and longer-term costs and paybacks, as well as overall ownership and control. The right funding for you comes down to what you qualify for and what you are willing to give up. Make sure you know both.
Perfect your pitch
All of this preparation was leading to one thing—asking for money. Whether presenting to a room packed with venture capitalists, meeting one on one with a banker, or casting a broad net through a crowdfunding platform, you must have a concise convincing narrative.
Alex Kenjeev, president of O’Leary Ventures, advises entrepreneurs to pitch the deal, rather than the business. Imagine yourself on the other side of the transaction and answer the questions you would have if you were the investor. A good pitch illustrates your awareness that those who provide funding want to be paid back.
CO— does not review or recommend products or services. For more information on choosing the best business loan and financing options, visit our friends at business.com.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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