Having made great progress with writing your business plan and crunching the financials, you may identify a significant funding need that cannot be bridged from your own resources (those of your relatives, friends, colleagues, credit cards, local bank manager ) or from the business's cash flow. Consequently, you will need to raise external finance in the form of equity or loans or an equity/loan combination. When writing your plan, devote a short main section to present your needs and proposals. Here are some suggestions:


1. To assess funding requirements, compile your projections without any external funding and take note of the peak cash deficit and its timing. Your total funding requirement is likely to correspond to this deficit. It should be injected (in one or more tranches) ahead of being required so as to eliminate deficits and perhaps create cash cushions. Analysis of projected financial ratios (debt/equity, interest cover and current asset) will help determine the optimal mix of debt and equity.

2. When assessing funding needs in #1 above, you should plan to finance the "most likely" case, or even "worst" case, rather than for the "best" case as revealed by sensitivity analysis. Whilst the "best" case may show the smallest funding need, it may be unattainable due to the inevitability of some aspect of the double (costs), double (time) or half (revenues) rule.

3. Summarize and tabulate your funding requirements. Indicate planned uses, possible sources and forms (equity, loans, grants, credit etc.), likely timing, security offered and desired terms. Mention any conditional or firm funding commitments already secured. For the benefit of prospective investors, indicate the likely equity funding required; range of the equity stakes on offer; exit routes ; board representation; and make a stab at the projected returns on their investment.

4. If presenting funding proposals, bear in mind the golden rule - he who has the gold makes all the rules. If valuing your business, be realistic and base it on more than one method of valuation e.g. net asset value, price/earnings ratio, capitalization/revenue ratio, industry yardsticks and so on. Take account of market sentiment/conditions, "going rates", maturity of the business and degree of risk associated with its plans.

5. Restrict this section of your business plan to less than one page. Keep it factual and avoid any "over-the-top" hyping of your business as the greatest investment ever !

6. If planning to raise equity from venture capital or "angel" sources, allow adequate time to raise it. Depending on the amount needed and track record of the promoters/business, this may take several months and tie up significant management resources throughout - brace yourself for several re-drafts of the business plan and financials.

Of course, you may wish to withhold specific funding terms until you have met possible investors or lenders face-to-face and heard their initial reactions. In this case, this section would be confined to a description of funding needs and possible uses, sources and forms.




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