Focus: Attracting the right funding for your business and clients

This approach can result in an overwhelming feeling of unpreparedness and disappointment for applicants. Many businesses may approach banks for loans. However, some might not meet mandatory requirements such as a three-year financial history or a robust trading record, leading to rejection. But some non-bank lenders will consider a viable business for funding.

Many funders are willing to look at unusual deals and respond positively to creative loan structures and proposals. However, most businesses don’t know how to access these funders and don’t know how to structure their proposals.

Preparing the necessary documents to apply for funding can seem daunting, but the process goes a lot more smoothly if it is tailored to what a funder will be looking for. To assist this journey, there are several fundamental requirements and documents required to ensure a business is funder-ready. These include:

REQUIREMENTS

An overview of the business

A crucial element for showcasing a company to potential investors and funders is a business plan. This document serves as a comprehensive representation of a company’s essence, encompassing details about business operations, such as its location, technical expertise, and the qualifications of key personnel.

Track record and expertise

Since funders have specific criteria, showcasing track records and operations will enhance the chances of being considered favourably. Additionally, providing a comprehensive view of the structure of a business, from leadership to potential co-investors, is a legal requirement under governance due diligence. In the funding evaluation process, scrutinising the credit history of shareholders and ultimate beneficiaries is imperative. Funders need assurance that a business includes individuals with a positive credit track record and those without political exposure or substantial connections. If a client in his or her personal capacity, or as a business owner, has had any adverse issues in the past, it’s best to be transparent and disclose this. This information will be discovered during credit checks and processes, so it’s best to be upfront.

Information on funding needs

This will cover the requested funding amount, the intended use of the funds, and the projected timeline for deploying them. Additionally, it will outline the specific financing a business is seeking, whether it is debt or equity, and whether it pertains to the short or long term. The document will also detail the pricing range and provide information about any co-funders who are participating in the transaction. Funders generally favour sharing risks with business owners whenever feasible, as it reflects the owner’s dedication and belief in the business. But while showcasing existing equity or a willingness to invest additional equity can make a funding opportunity more appealing to funders, it is not a mandatory element for securing funding, especially when the required documentation is effectively presented.

A financial model/budget/forecast that demonstrates cash flow

This allows funders to assess the ability of a business to generate enough income to either meet the obligations of debt financing or yield returns for equity investors. A funding application can be supported by market research to substantiate projections and validate the market opportunity. The financial model should encompass aspects such as costs, expenses, sales growth, profit margins, a balance sheet, and a cash flow statement. It’s essential to include key ratios pertinent to the business and industry. It’s worth noting that many funders prefer to see budgets that outline these factors for a minimum of five years, although strong financials can make up the shortfall in the timeline of a business.

Other documents that are needed

Businesses are required to provide management accounts and the most recent financial statements. Additionally, supporting documentation will be needed such as guarantees or other agreements that substantiate its funding requirements. This documentation may include any offtake agreements, cost quotations, and relevant FICA information, including identification details of directors and shareholders, incorporation documents, the company’s tax number and clearance certificate, B-BBEE certificate, the CVs of directors and shareholders, along with the personal asset and liability statements of shareholders if they act as guarantors, as well as bank statements and proof of the where the business is based.

ESG factors also have a role to play

It’s entirely possible to structure a funding arrangement that, beyond assessing financial metrics, takes into account the positive influence a company has on crucial social and environmental matters. Factors such as job creation, social upliftment initiatives, and environmental considerations become integral. While the business must still demonstrate financial viability, robust environmental, social and governance (ESG) credentials can enhance its appeal as a suitable candidate for funding. The demand for heightened awareness and action regarding ESG issues is more pronounced than ever, and the advantages extend beyond their intended objectives.

Lenders seek businesses that exhibit a steadfast commitment to enhancing the environmental and social dimensions of their operations, contributing positively to society at large. Apart from generating employment, there are various other examples of impactful initiatives, such as enhancing community infrastructure, investing in renewable energy projects, supporting housing developments, and promoting financial inclusion or educational outreach. The possibilities for positive contributions and innovation are extensive and diverse.

Lenders place significant emphasis on what a business generates. While solid financial figures are crucial, incorporating ESG factors into the deal makes it more enticing for many funders to commit. The foundational aspects of a business and the measurable impact on the environment and society can serve as the key to expanding available funding opportunities.

GETTING FUNDING OVER THE LINE

It can be a process to align all the necessary steps in a funding application or to consolidate existing funding lines. But in the end, this process can lead to a better funding deal outcome, simply by being as prepared as possible. Keep in mind that having funding lines in place, even before a business needs them, ensures that it is possible to act on growth opportunities as soon as they arise, from securing new premises to acquiring the tools and talent to see a business thrive.

Authors
Gary Palmer ACA, Founder and CEO of Paragon Lending Solutions