Somewhere in the world, an entrepreneur sent his business plan to a few VCs, and overnight he has raised millions to fund his idea. Somewhere else, a small-business owner is struggling to make ends meet, and investors, banks, and even family and friends are reluctant to contribute any cash. Why does this discrepancy exist? Why can some businesses find funding so easily while others struggle for years to raise a cent?
The answer is simultaneously, more obvious and unclear, than you might expect. Many entrepreneurs fail to recognize evident signs of their financial illiteracy and poor credibility; meanwhile, many entrepreneurs have outstanding ideas but fail to attract funding with poor pitches. Whether you want to avoid becoming a promising entrepreneur without the necessary cash or you already are that disadvantaged business owner, here are a few ways to find out why you aren’t finding funding.
VCs, investors, and even family and friends can smell when a business isn’t a smart investment. To an entrepreneur, a flaw might seem infinitesimal compared to the brilliance of the business idea, but to experienced financiers, that flaw could easily be a deal-breaker. Here are a few flaws that might be thwarting your funding efforts:
Because you largely determine your business’s financial practices, your personal credit score factors into your business’s creditworthiness. Before you apply for funding, you should engage in practices to increase your credit, such as changing how you use credit cards and make payments.
If you already took out a business loan or two, you will have trouble acquiring another one. Every debt you acquire stretches your available cash even thinner. So until you pay down your existing debt, you present too risky an investment avenue.
Younger businesses typically haven’t done enough legwork to prove themselves profitable, making them ineligible for some funding options, like lines of credit. Sometimes, you just need to hold fast for a year or two before lenders and investors start lining up.
Cash flow is one of those problems that can plague every business, especially in the initial stages. Still, you should do your best to demonstrate strong cash flow potential or modify your model to ensure a more balanced flow.
If there are any issues with your personal or business taxes – including liens or unfiled returns – you can’t verify your earnings, which means you aren’t a trustworthy investment.
It’s important to remember that funding is a risk for everyone involved: You need to find a funding option that works for your business, but lenders and investors need to find a venture that is going to pay off. Before you can receive funding, you need to fix any inherent issues in your business.
Fortunately, you might not have a deal-breaking flaw so much as you aren’t properly selling your business idea to your potential financiers. Before you make another pitch for small-business funding, you should review the following aspects:
Your plan should be as brief as possible with an approachable – not technical – language and organization. Additionally, you should avoid falling into common traps, such as overvaluing your business or claiming that you lack competition. Investors mostly know the market better than you do, so you should tell the truth clearly and openly.
It’s important to remember you can’t judge the value of your own business – the market does that for you. Instead, you can only report facts about your revenues, gross profit margins, and available cash. You should be detailed and avoid fluff words that add no meaning, like “aggressive” and “conservative.”
It’s safe to say that every investor or lender has a preferred style, but there are some stylistic details that matter across the board. You should have a professional editor review your document for spelling or grammatical mistakes, repetitive phrasing, and overall appearance. It would be a shame to be denied because you used the wrong “there/their/they’re” too many times.
Without a doubt, this is the trickiest of all pitch-related issues. You need to make your move at the right time for the market, but usually that doesn’t give you much time to prepare. Funding can take months to procure, even after a pitch is successful, so the sooner you send your plan out, the better. Still, hastiness and under-preparation are obvious in business documents; your execution must be perfect, which is exasperating and exhilarating at once.