7 questions you should consider asking before applying for equity funding

Posted on by experian

Estimated read time: 6 mins

It’s pretty much a given that in order for your business to grow, you’re going to need additional funding at some point in time. Whatever shape these funds take; be they a traditional bank loan, crowd-sourced capital or equity investment, there are numerous different options available and it’s easy to see how things can get quite confusing very quickly. If it’s equity finance you’re considering, here are 7 questions you should consider asking before you apply.

Equity funding

1) Is your company a registered limited one?

In order for equity finance to be a viable option, you ideally need to be a limited company, thus allowing for shares to be allocated to would-be investors. If you’re not a limited company, but would like further information on the various other funding options available, read our blog here on 7 types of funding for SMEs and trends in lending.

2) Do you have a business plan and is it current?

Not only are business plans helpful, they’re essentially a must-have when it comes to raising funds for your business. Not only that, they’ll need to be kept up-to-date and withstand scrutiny. That’s not to say you’re expected to be able to see directly into the future; the basic standard is to present cash flow information and financial forecasts at the very least.

3) Do you have financial forecasts and do they offer enough detail?

A crucial piece of collateral for your equity funding application, detailed financial forecasts are typically expected in order to not only attract potential investors, but to convince them too. The three basic financial statements that’ll be expected within the forecasts are your Profit and Loss Account (P&L), a Cashflow Statement and a Balance Sheet. If you want to find out more about financial forecasts and how to prepare them, click here to visit Shell LIVEWIRE’s guide. The ultimate aim is to prove that you’re not only financially sound now, but also that you will be in the future.

4) What will you do with the money?

I’m sure you’re not planning on investing in a crate of champagne to celebrate, but it’s important to sit down and think about exactly what the money will be spent on. Generalised statements typically won’t be convincing for investors, so it’s in fact integral to make some strategic decisions and document these carefully in a plan. Detail is key here, so be meticulous and deliberate.

5) Is the experience of your management team both credible and relevant?

Often investors will study and scrutinise a plethora of information available to them about your business, near the top of that list is your management team. This isn’t to say it’s a character assassination; they’re simply interested in overall strengths and weaknesses and they’ll also be looking out for established and proven experience of growing a business.

If you feel you’re already in a good place, it can’t hurt to try and add a bit of credibility to the mix and also have a think about how you’re actually going to communicate and demonstrate this experience if it doesn’t necessarily speak for itself.

6) What’s your exit strategy and is it clear?

Certain investors will be fairly keen to hear what your exit strategy is, alongside having some tangible evidence of your commitment to this. This certainly isn’t important for all investors to hear as you may well be in this for the long run, but if you take some time to plot out the possibilities at various stages, you can present these if required. For example, are you looking for quick and substantial growth, with a hopeful sale of your business within the next 5 years?

7) Can you pitch?

Unfortunately (for some), often with seeking equity finance, you’re going to have to deliver a pitch to investors. We’ve all seen Dragons’ Den, the ups, the downs and the awkward in-betweens, whilst it does prove for some light entertainment it also is an excellent educational tool. Whilst it’s unlikely you’ll be seeking personal investment from stars of reality TV, pitching to any investor is no walk in the park. If you’re already experienced in this, excellent, if you’re not, there are numerous fantastic tools available to help you prepare.

Number one on the list has to be the internet, simply conducting some relevant searches and accessing a broad range of information that’s readily available to you, for free. Alternatively, if your budget permits it, you may wish to consider the likes of a business coach.

Finally, good luck! Be meticulous, stick to your guns, do your research and be true to yourself. Don’t just make decisions on a whim and always ensure that you empower yourself by being as well-informed as possible before seeking any form of finance.

Don’t forget that there are other options for funding out there and regardless what you go for, it might be a good idea to access your business credit report to help you make sure that your business is seen in the best possible light by lenders. To find out more about how we can help you with My Business Profile, please click here.

Sources: (1) sme-blog.com, (2) shell-livewire.org

 

 

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