Hard truth about business funding no one tells entrepreneurs

Photo: Gemini

Businesses that attract funding are those that can demonstrate a clear opportunity for growth and the systems needed to support it, says financial literacy expert Patrick Wameyo.

He says funders are primarily interested in businesses with growth opportunities, strong leadership, sound financial discipline and management, market niche, customer base, transparency, and potential for developing new products.

A business that can show how investment will help them convert opportunities into sustained progress and can run effectively without the constant involvement of its owner is viewed as attractive.

He explains that businesses can already have strong market potential but lack the systems needed to acquire and retain customers. These systems include business processes, technology infrastructure and skilled people.

“For this reason, funding always comes with technical support because the business owners being funded may be able to see the opportunity but lack the technical know-how to implement the required business system,” he says.

A clear business model also strengthens a company’s appeal to funders. It shows how value is created and delivered while highlighting areas that should be prioritised for investment to make the greatest impact.

He insists that businesses that can’t demonstrate demand for their products or services don’t get secure funding.

“Market opportunities vary widely and may include the benefit the funded business is adding to the existing ecosystem of the funder, for example, as a source of raw materials for their other business,” he says.

Patrick points out that investors and lenders want to see a working product and sales revenue; therefore, business owners need to take steps before approaching them. Businesses with existing revenues can also miss out when they can’t show strong future growth prospects.

He says that while lenders and investors don’t evaluate the same things, they want to know if the business can generate enough money to meet its obligations. Lenders focus on the ability to repay loans, while investors look for long-term growth and returns on their investment.

“Choosing between a loan and an investor depends on the business's needs. Loans serve short- to medium-term purposes or needs of the business. Investors bring in patient capital for purposes which can’t be funded by loans,” he says.

Businesses seeking funding should have financial documents such as balance sheets, profit and loss statements, cash flow statements, and financial projections. He points out that insufficient record-keeping can raise concerns and make funders unable to assess the true performance of a business.

He insists that small businesses can improve their financial credibility by keeping accurate financial records and using systems that provide reliable information when needed.

The other way funders assess demand is by examining a company’s market share and how it performs relative to competitors. Consistent growth in customers and sales shows that the business has a product or service that the market values.

Profitability also determines funding decisions, he adds. Profits can be used to repay loans, while retained earnings can help fund growth before external funding is sought.

“Cash flow is important when approaching funders. It is the blood of a business. Cash flow demonstrates your ability to pay back the debt or funding,” he says.

However, he notes, there are no specific financial indicators that show a business is ready for funding. Readiness depends on if the business has reached important milestones to support future growth.

“Funding is milestone-based. A milestone is a development in an aspect of the business that will lead to major improvements in business performance and in effect make another aspect of the business ready for funding,” he says.

Funders also look for businesses that are sustainable by staying relevant to their customers. This means improving existing products and introducing new ones that respond to changing customer needs, as this builds customer loyalty.

He advises entrepreneurs to fully research potential funders and prepare their businesses to meet investment expectations. Funders, on the other hand, should seek professional advice on business valuation before giving up equity. A strong reputation and transparency help funders gain confidence in a business even before formal due diligence.

“Entrepreneurs can build trust by engaging with organisations that link business owners with potential investors. They provide events where the parties get to meet, familiarise and engage, usually with the help of the professional along the journey,” he says.

Governance is another important factor regardless of a company’s size. It secures assets and therefore provides peace of mind to the investors who depend on the assets to generate cash flow for the business.

Finally, funders are attracted to businesses that can scale. Scalability depends on factors such as resources, partnerships, operations, distribution channels, and customer relationship systems. However, some growing businesses still struggle to attract capital because of limited growth opportunities and concerns about compatibility between founders and investors.

“A business is usually ready to seek external funding once it has developed a prototype, tested it in the market, generated revenue, and gained a better understanding of customer demand. Business owners should focus on investor readiness before approaching funders,” he says.