Funding Request and Return

Adapted from content excerpted from the American Express® OPEN Small Business Network

State the amount of funding and the type (debt or equity) of investment you seek. It is important here to provide a breakdown of how the money will be applied. Discuss what effect the capital will have on the business’ potential to grow and profit, when the money is needed, and what investment has already been made in the company.

Investors will also want to know what they will receive in return for their capital. Be as clear as you can in this section both about the potential upside and the potential downside of investing in your business. A common mistake in a business plan is to be unclear in this section, which turns potential investors away. If the company founders have invested in the company, include this in your plan. Some investors are encouraged by founders putting their own money on the line.

Finally, create an exit plan that describes how investors will get their money out of your company. One common investor worry is that even if a business is profitable, it may be difficult for them to get a good price for their shares. A cash-out option in five years or assurance that the company will become a strong candidate for a purchase or an IPO (Initial Public Offering) are what many venture capitalists and lenders will insist upon. See the sample exit plan in the toolbox.

Tips

• Include the following elements as appropriate: minimum amount to participate; how this capital and future investment will dilute current and subsequent ownership; payback period and return on investment; why the investment is sound; collateral being offered; current investors; access to additional funding sources; what percent, if any, an investor could recoup via tax benefits, liquidation or other means if the business goes sour.
• Include future financing needs. In other words, don’t just look at what you need today, but give an idea of what financing you will need in the future to take your company to the next step toward success.
•  Be sure to document how investors will make money and what return they will get. This can’t be stressed enough. If you’re asking for money, you can’t just say something like “you’ll make lots of money from this.” You need to show how much money they should expect to make from their investment.
• Avoid unrealistic company valuation.
• Don’t be penny-wise and pound-foolish by asking for less money than you think you’ll need because you think it will help you get the money. It may be better to ask for more than to have to go back to your financial resources when you’ve run out of cash.

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