One of the greatest challenges and mysteries to business owners is what it takes to get financing, either equity or loans. This is because most owners are trained to run their businesses and not familiar with financing transactions. This is where a CFO is invaluable. In this article, however, I will try to simplify the mysteries of what the investors and lenders are looking for.

 

Business Plan - Investors and lenders want to see a business plan which projects the next two to three years. It should include details of the marketing plan, supply chain and key growth parameters of the company. Often forgotten in the plan is the amount of money the company is looking for, what it will be used for, how much equity the investor will receive and their exit plan or interest and payment terms on the loan.

 

Financial Statements - In addition to the business plan, the investor or lender may require audited or reviewed financial statements. If so, interview a few respected firms and make a decision. Bigger is not always better. An audit demonstrates to the outside world that the financial statements correctly reflect the current position and past operating results of the company. Sometimes, in lieu of an audit, a financial review is requested. This is where an accountant reviews the company’s financial statements for reasonableness and does not provide its assurance that the assets and liabilities of the company have been verified and all is exactly as stated. Since it requires less time, the cost is significantly less. Many companies are audited annually and reviewed quarterly or semi-annually. Typically audited statements can cost anywhere from $10,000 to $50,000 for a small to medium size company and significantly less for a review. If your company cannot afford to do an audit or a review, the financier will probably ask for the last three years of tax returns which should be similar to your internally prepared reports.

 

Collateral and Personal Guarantees – Most lenders will also require some collateral and personal guarantees. Collateral gives the lender some comfort that the loan will be repaid and usually includes inventory, equipment, real estate and receivables. Along with this, the lender will probably require a personal guarantee or a pledge of personal assets as mentioned above. The reasoning behind the personal guarantee is that the lender wants some assurance that if the owner takes the too much or all of the business’ assets and the company fails, he is still responsible for repayment.

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Management – Investors and lenders will look to the company’s management team to judge whether the people in charge will be able to execute the business plan. Most lenders and investors will want to interview the managers and may ask that new people, such as a CFO, be hired to ensure proper controls and ensure fiscal responsibility.

 

During these difficult times, financiers want to see that the company they are considering putting money into has internal policies, procedures and controls, its finances and financial statements up to date and in good order. Often, it is wise for a company to engage a part time Chief Financial Officer to help it get organized so it can put its best foot forward.  

Tags: AskTheCFO, Business Debt Reduction, Business Debts, Financing, Part time CFO

This entry was posted on Saturday, September 12th, 2009 at 4:46 pm and is filed under Business Debt Reduction, CFO, Financing, Mobilman, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.