In Cashlandia, money literally grows on trees, so Benjamin decided to start his own business: Loot Landscapers. Loot’s specializes in growing and planting coin saplings for new homeowners looking to monetize their lawns.
Even though money grows on trees in Cashlandia, business funding requires money from a specific and very rare form of tree currency. It’s difficult to find and can only be secured through a bank by providing solid financial records, thoughtful SMART goals, market research, and strategic forecasting. Unfortunately, Ben’s skills lie solely in landscaping, not finance. His proposals for funding were turned down repeatedly before he finally decided to hire a Fractional CFO to help. After working with a CFO, Ben had a strong proposal to successfully secure funding. He is now growing coin saplings for Cashlandia’s newest homeowners and making bank!
In the United States, where money sadly does not grow on trees, securing business funding can still feel like finding a rare form of currency. It requires complicated research, formulas, and forecasting that can only be done well by a financial expert. I would love to serve as your Funding Arborist, identifying exactly what type of business funding you need and building a strong financial proposal to successfully secure it. Schedule a call with me today to chat about your current financial landscape.
What type of business funding do I need?
Benjamin had several choices to secure business funding, and so do you. When exploring business funding options, you can consider:
- Self-Funding – using your own personal savings or existing assets to finance your business, offering complete control but potentially limiting rapid growth with potentially significant risk to those personal assets. It’s often the initial capital source for many startups.
- A Business Partner – someone who contributes capital in exchange for a share of ownership. This option not only provides funds but can also add valuable expertise to your operation. Just be sure you know who you are “marrying” in your business.
- Selling Equity to Private Equity (PE) and Venture Capital (VC) Firms – groups of people who invest substantial capital in businesses by purchasing a stake in exchange for a significant ownership percentage. They aim for large returns when the company goes public or is acquired.
- Angel Investors – wealthy individuals who personally invest their own money directly into early-stage companies, often in exchange for equity. They provide capital and sometimes mentorship. Have you seen Shark Tank? The TV show’s “judges” are angel investors.
- Bank Loans – typically offered to established businesses with a solid financial history. There are two types of bank loans a business can secure:
- Line of Credit – a flexible, short-term borrowing option to cover cash flow gaps, allowing you to borrow and repay funds up to a set limit. Banks view these as riskier since usually the only thing securing them are your future receivables, which fluctuate frequently.
- Secured Asset Loans – These loans are tied to specific assets like equipment or real estate, which serve as collateral, making them less risky for banks and often available for longer terms with fixed interest rates.
Knowing your options and how to choose the right one (or mix!) for your business is the first step towards funding success.
What do I need in place to successfully secure funding?
Funders want to know how your business is doing now, what your business has done in the past, and how your business will do in the future. These three indicators tell funders how likely it is that they will be paid back after lending you money… and that answer determines if they say yes or no to your request.
All funders want to see meticulous historical financial data. This means having clean, accurate, and up-to-date records, including a balance sheet and monthly profit and loss statements, to clearly demonstrate your business’s financial health over time.
Banks, in particular, rely heavily on past performance to assess risk and inform their lending decisions. PE/VC firms focus on future projections.
Pro tip: Banks strongly prefer to lend when a business is financially stable rather than in distress. Getting a bank loan before you actually need it increases your chance of success. (I always say that banks happily loan money to businesses who don’t need the cash, and are the first to decline a business which does.)
What are the components of a strong financial projection?
Messy or incomplete books can deter potential funders, but also make it difficult to build reliable forecasts. Garbage in, garbage out, as the saying goes. Organized and accurate bookkeeping allows you to create credible projections, serving as a roadmap for your business’s future and giving funders confidence in your ability to succeed as a business, supplying a return on their investment.
In addition to accurate historical financial records and realistic SMART goals, Benjamin needed a strong financial projection to secure the funding he needed to move forward with Loot Landscaping.
The first step towards crafting a strong financial project is knowing your market. Using Cashlandia as our example, the new housing market is booming. But that isn’t enough to get funding. Benjamin needs to know how many new homes are being built this year and each year after. He also needs to know how much of the market he is able to capture.
After Benjamin’s new Fractional CFO takes the job, deep market research begins. Within a 100-mile radius of Loot’s, permits were issued for 30,000 new homes this year. Loot’s goal is to sell an average of 6-coin saplings to each homeowner for $250 each; so $1,500 per home x 30,000 new homes = a market potential of $45 million. It’s unlikely that he will get 100% of the market, and decides 5% is reasonable: 5% of $45 million = $2.25 million potential revenue for Loot’s Landscaping in the first year.
If you are good with word problems, the formula above isn’t too complicated…but that’s just the first step. You also need to project the future of new home permits each year over time, which isn’t a straight line, and varies greatly depending on costs of construction materials and whether the economy is in a recession or boom time. The other side to remember is that as the business grows, expenses change. You might need to hire new employees – but what positions and when?
When you pursue PE/VC funding, you must also tailor your projections to match their requirements and answer their very specific questions, such as:
- How long will it take to pay them back their original investment?
- When are you going public/selling?
- What is the rate of return over what time period?
These are just a few components of what it takes to develop a strong financial projection and gives you an idea of the complexity involved.
How to build confidence in your financial projection
PE/VC investors are taking a big risk by funding your business, so they rely heavily on future projections. There are many mistakes that can be made (like treating positive cash flow and net income as the same thing or not stress testing your projection). A Fractional CFO has the knowledge and expertise to develop strong financial projections so that you get the “YES” for funding. You don’t have to flounder through the process of securing funding. I’m here to help. Reach out to me today for a free financial projection consultation.
