What do lenders care about?
aka ensuring that you are better prepared in your organization, your business plan or pitch deck documents when seeking funding from for rigorous investors (e.g. VC, PE and banks)
September 23, 2024
About the writer
Dickson Wasake is the COO of Ingram Advisory Group he has over 20 years of experience from over 5 countries including the USA, Canada, the UK, The Bahamas and Uganda. Dickson is a UK qualified CPA (FCCA) and has completed the exam requirement for the US CPA. Follow him on Linkedin.
The reality about other people’s money
In business, the reality is that at one point, you will most likely need to apply for a loan or seek financing from a 3rd party. Assuming your idea is viable and you have adequate security (if looking for a loan) then there are a number of things to know about from the lenders’ perspective, because like in the “Art of War” a book on military strategy, author Sun Tzu says: “Know your enemy.”
Over a number of years, I have reviewed the typical funding requirements of more than 20 financiers of different types including:
Venture Capital (VC) Firms - This is funding available primarily for startup companies. The venture capitalist usually takes a % of shares (instead of collateral) and expects to exit in say 5-7 years from the company.
Private Equity (PE). This is funding available primarily for established business to grow to the next level. The private equity fund also takes a % of shares or might also offer debt or a combination of both.
Traditional lenders (e.g. banks, leasing companies and bodies like SBA)
Grant providers.
I did this by reviewing their individual websites and funding requirements for these over 20 funders!
When I studied their requirements a number of common trends emerged. The following are the key considerations from the lenders we researched on:
Corporate governance
First things first. What is corporate Governance? Put simply: “It is the process by which the company’s management is being monitored by someone else.” It is the process of for example having a board of directors to set the framework and to whom management are accountable.
Why is this stuff important for the lenders/financiers?
In many cases, there is a direct correlation between companies failing (failing to take off, making losses, winding up) and not implementing proper checks and balances.
Besides these lenders themselves are often supported by institutional investors, pension funds, government bodies, international lenders (like IMF) and other backers who need to be sure that the entity they are investing in is running the business properly with proper checks and balances like: board of directors meetings, a board with an independent non-executive, regular accounts and regular internal control checks.
All the largest and most successful companies have strong corporate governance and so likewise these lenders expect that before they part with their hard earned money, you will have this in place.
Audited accounts
It goes without saying that typically for you to get 3rd party funding, they will expect to see your books of accounts, as independently reviewed by an auditor (a special type of accountant). Auditors are sometimes referred to as public accountants.
Why is this stuff important?
The lenders are investing their money (or other people’s money) so they need to reasonably satisfy themselves that you are giving them the “real deal”. Many of these firms will expect at least 3 years of audited results (hopefully profitable). The more reputable your auditor, the higher the chance that they will take you at your word.
Scalable market
A lot of these guys, say like the venture capitalist firms are looking to make a profit from their shares in your company, should it turn out to be the next big thing (like say Nvidia, Google or Face book). They want to get say 5 times their investment and to get this kind of return; they need to be sure that your market is big. Scalable basically means that if the concept/idea works say in South Florida, then it can be repeated/rolled out in say North Carolina, London and East Africa. For example like Mobile Money.
Team
For financiers, it is critical that the borrower’s team is experienced, ambitious and has vision to implement its strategy. It means that if you are to therefore put together your business plans, you need to clearly put together a strong balanced team with sufficient experience. One that will convince lenders that the idea will work successfully and the team knows what it’s doing (and where its going).
Ethics and social impact
Financiers are increasingly conscious about whether the company will act responsibly and hence ESG is a pretty important thing. There is nothing that damages a company’s fortunes like bad publicity from unethical practices (such as land grabbing) and in this day and age, information travels very fast via X (formerly Twitter), TikTok, Facebook and other social media platforms.
It is therefore important that your business plans can clearly show how your plans will first not do harm to the community but will more importantly be impactful – in your local community.
Bringing it all together (aka what this means for you)
How can you in light of the above information ensure that your organization is better prepared for additional capital or funding? Some of the example points to note from the above are:
Corporate governance - ensure you have a board of directors in place and that regular meetings are taking place.
Audited accounts - find a CPA firm who can help you, up to 3 years in advance to ensure your books are in order.
Scalable market/team/ESG impact - ensure your pitch deck and business plan documents quite clearly show your strategies for scaling your market, meeting ESG requirements as well as showcasing in detail the excellent team who will pull this off!
You will likely need help because investors can likely spot amateurish effort and that which has been through a professional. Can you afford to make such a mistake?
IAG can help you ensure that you will successfully get the funding you require through our capital readiness offering. We are ready to help you, are you?
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