KŌNAE AKO 4
Seminar: Applying for Finance
HE PAEMAHI KŌWHIRINGA THE ELECTIVE PROJECT
Introduction
The DSBM programme is all about implementing projects in your business to grow or improve it. However, as you would have already found, business growth and development typically comes at a cost. One of the first thoughts which cross a business owner’s mind when planning a project is, “How am I going to pay for this?”. This seminar therefore looks at ways to finance your business and what you need to do to obtain this money.
The main sources of finance available to small business owners can be grouped into three categories: equity, borrowing, and ‘other’ sources. Equity includes both money and assets the original owner(s) contribute to the business, as well as investment in the business from others who become owners. Borrowed money which must be repaid is called ‘debt finance’. Other sources of finance include grants, as well as your customers and suppliers. In Parts A to C of this seminar we will look at these sources of funding in more detail.
Some funding involves an application process which can be difficult for small business owners to navigate. In Part D, we therefore consider the questions included in application forms and look at how to emphasise key content. Part of the application process involves providing supporting evidence. We therefore look at the types of forecasts and financial information a funder will require. In short, funders need to know that you will have cash available to repay any money lent on time, be able to provide a financial return on their investment, and your business is likely to be viable in the long term.
Before receiving finance, small business owners usually have to meet with the potential lender / investor. Regardless of how good an opportunity looks on paper, an investor may decide to turn you down based on the impression that you make. Therefore, in Part E of this seminar, we will consider some key tips for meeting with potential funders.
Contents
This seminar covers the following topics:
Part A: Equity Financing
• Self-Financing or Personal Equity
• Angel Investors
• Venture Capital
• Crowdfunding
Part B: Debt Financing
• Main Forms of Debt Finance
• Alternatives to Banks and Finance Companies
• Peer-to-Peer Lending
• Debtor Finance
Part C: Other Sources of Funding
• Grants and Non-Monetary Assistance
• Arrangements with Suppliers
• Advance Payments from Customers
Part D: Application Documentation
• Content of Application Forms
• What Information Should I Emphasise?
Part E: Meeting with a Potential Investor / Provider of Finance
• The Verbal Presentation
Part A: Equity Financing
“Before you even start building your crowdfunding page, start building your crowd first.”
– Roy Morejon
Equity finance refers to the business being funded by the owners. This includes you, the original business owner, as well as anyone who later becomes an owner through investing in the business.
If you, or any of the other owners of the business are not able to contribute funding to the business, choosing equity financing involves giving a portion of your business to an investor in return for capital. Partnerships, angel investment, venture capital, and crowdfunding are all forms of equity investment. Listing your company on the stock exchange, also known as a ‘public share offering’, is another type of equity finance, but is only suitable for large or high-growth businesses.
Two advantages of equity finance are that:
1. you do not have to make loan repayments, meaning that investment capital can be used to grow the business, and 2. you can gain access to the investor’s networks and expertise and use these to enhance your business skills and capabilities.
The main disadvantage, of course, is that the investor becomes a part-owner in your business.
Self-Financing or Personal Equity
Most businesses are funded, at least in part, by the owner. Most investors and lending institutes require that the entrepreneur contributes some of their own money to the business before they will also invest. The requirement is generally that the owner contributes 30% of the necessary funding before the remaining funding is granted, although this will vary. For instance, grants often require 50:50 co-funding.
Personal equity may come from savings, the sale of an asset such as a house, or from a loan against the equity in the entrepreneur’s home. It can also be in the form of personal assets such as, for example, vehicles, buildings, tools and equipment, contributed to the business.
Angel Investors
Angel investors are generally wealthy individuals or groups of individuals who use their own money to invest in high risk entrepreneurial firms. Most angel investors have founded and run their own business, so they have sound experience in developing businesses and know what to look for when selecting an enterprise to invest in.
Some of the main things investors look for include:
• high growth potential (e.g. technology businesses),
• the potential for the business to export,
• good management,
• people within the business who have good selling skills (having a good product alone is not enough to grow a business),
• good intellectual property and protection for that property,
• solid market research, and
• an appealing exit strategy for the investor.
An exit strategy is important for a potential investor because it details how they will be able to make money from their investment. Although some angel investors invest simply to support others in their ventures, the majority invest for financial gain. That is, they are trying to make a good profit on their investment. They therefore want to know when and how they will get this.
Some exit strategy options include:
• a ‘shareholder buy back’ where you buy out the investor’s shares,
• growing the business and listing it on a stock exchange (enabling the investor to sell their shares to the public), and
• selling your entire business in a specific number of years once it is successful.
Angel investors also typically favour investing at the start-up or early expansion stages of a business as opposed to ‘seed’ or later expansion stages. The ‘seed’ stage is the early stage of business development in which the new venture is still just an idea. Funding is usually sought at this stage to investigate the feasibility and value of the venture or for research and development.
Jamie Beaton, co-founder and CEO of Crimson Education, an Auckland-based global tutoring and mentoring company, raised millions in capital from angel investors only months after the start-up. Jamie states in his interview with the NZ Herald that he had recently graduated from high school and had no money or capital to grow his business. His tutors and mentors were sourced from his networks and school connections.1 Not long after the startup, Jamie was invited to the 2014 Ice Angels showcase and after seeing his first-year cohort’s results, they invested $1.5 million in the start-up company. Crimson Consultancy was worth $205 million very soon after (in 2016).2
NZVIF is a Government-owned company that supports venture capital investment and angel investment in New Zealand. It operates two investment funds, one of which is a ‘Seed Co-investment Fund’ of $50 million. This fund matches the investments of partner angel investors into young technology businesses.
The Angel Association grants the prestigious Arch Angel Award annually to highlight the work of angel investors in New Zealand. This award was first granted to Sir Stephen Tindall in 2009, for his significant investment in seed and venture capital companies. It was reported that he and his family had invested in over 100 New Zealand companies.3
1 NZ Herald. (2016).
2 Townsville Bulletin. (2016).
3 NBR.co.nz. (2009).
USEFUL WEBSITE:
Information about angel groups in New Zealand is given on the website of Angel Association New Zealand. This organisation aims to promote the growth of angel investment in New Zealand. It does this by encouraging and educating entrepreneurs, new angel investors, and angel groups.
• Angel Association New Zealand – www.angelassociation.co.nz
Venture Capital
Venture capital can be defined as ‘a high-risk investment in a high potential opportunity’. Unlike angel investors, venture capitalists are usually groups or organisations that invest using organisational funds money rather than personal funds. They tend to invest a higher amount, usually in excess of $1 million, and are looking for a return of 30-50%. They often want to play a far more active role in the management of the business than an angel investor would.
USEFUL WEBSITES:
There are some key services available in New Zealand to assist businesses to find venture capital:
• NZ Growth Capital Partners (www.nzgcp.co.nz). They provide two funds, Aspire NZ Seed Fund supporting tech start-ups and Elevate NZ Fund, for established businesses to accelerate to the next stage of development.
• NZ Private Capital is a not-for-profit industry body (nzprivatecapital.co.nz) which provides useful information and links to other New Zealand and international venture capital sites.
• The New Zealand Investment Network (www.newzealandinvestmentnetwork.co.nz). An online platform connecting start-ups with a global network of angel investors.
Crowdfunding
The Financial Markets Conduct Act 2013 provides businesses with two options for raising finance. One of these options (Peer-to-Peer Lending) will be discussed in Part B of this seminar. The other option is crowdfunding.
Crowdfunding enables businesses to seek finance from members of the public and is equity based. That is, crowdfunding involves a private company selling shares in its business instead of borrowing money. Crowdfunding is different from angel investment in that it involves attracting small equity investments from a number of individuals, as opposed to a large investment from a wealthy individual.
Crowdfunding works in a similar way to peer-to-peer lending: businesses who want to find equity investors through crowdfunding use the services of an equity crowdfunding facility (an organisation which has been licensed by the Financial Markets Authority to provide crowdfunding services). If the facility considers the business is suitable for crowdfunding, it will advertise the investment on its site. People who are interested in investing can view the offer and choose to invest.
Businesses are allowed to raise up to $2 million each year through crowdfunding. They do not have to issue a prospectus or investment statement to potential investors. Although crowdfunding has the advantage of providing access to a large pool of potential equity investors without too much paperwork, it is not ideal for every business, or business owner. Business owners need to be comfortable with the idea that people (who are likely to be complete strangers) will have shares in their business.
Discussion Questions:
• Would you consider crowdfunding? Why or why not?
• What risks are associated with equity investment, and how can you protect yourself against them?
Part B: Debt Financing
“A bank is a place that will lend you money if you can prove that you don’t need it.”
– Bob Hope
Debt financing is finance that is borrowed and which must be repaid, usually with interest. The 2017 Business Operation Survey found that New Zealand businesses tend to seek debt finance more often than equity finance. In 2017, a total of 87% of small businesses which applied for debt finance found that finance was available on acceptable terms. Only 5% of businesses which applied for debt finance found that it was not available at all. This compares to statistics of 94% and 2%, respectively for the previous year.5
Main Forms of Debt Finance
The main forms of debt finance include:
• bank or finance company loans,
• loans from family and friends,
• overdrafts,6
• short-term bridging finance,7
• credit cards, and
• hire purchase agreements.8
If obtaining debt financing from banks and finance companies, some form of security is usually required. Business assets may be used as security, however personal security in the form of a personal guarantee or mortgage on your home is often requested.
One point to consider is the implication this has on asset protection. Some people choose a company structure to help protect their personal assets from business debts. When you provide a personal guarantee, this protection is removed for that particular lender. However, providing this type of guarantee may be unavoidable when it comes to borrowing large sums of money.
4 Statistics New Zealand. (2018).
5 An overdraft facility provides for someone to withdraw more money from their bank account than the amount that they actually hold in the account. The limit of the overdraft is pre-arranged with the bank.
6 Bridging finance is a loan to cover a short-term shortage in finance. It is usually used when someone purchases a new property before their existing property is sold.
7 A hire purchase agreement is an arrangement to purchase goods whereby the purchaser pays for the goods in instalments. Although the purchaser takes possession of the goods immediately, they do not legally own the goods until all payments have been made.
Alternatives to Banks and Finance Companies
There are several organisations which offer an alternative to using the established trading banks and financial institutes for debt finance. One example is The Māori Women’s Welfare Development Incorporation (MWDI) which offers low-interest loans of $10,000 to $50,000 to entrepreneurs of Māori descent. To be eligible for one of these loans, you must either be a Māori woman, or be a Māori male and have a Māori woman in a core part of the business’s operations. Furthermore, you must not be able to access a loan from other financial lending organisations (such as banks).
A few examples of alternative sources of loans are:
• Just Dollars (www.justdollars.org.nz)
• North King Country Development Trust (www.nkcdt.org.nz)
If you would like to use debt finance, but need help finding a lender or finding the best deal, one option is to use the services of a finance broker. One example of a finance broker is Finance New Zealand (http:/www.financenz.co.nz/)
Peer-to-Peer Lending
Peer-to-peer lending is provided for under the Financial Markets Conduct Act 2013. It involves businesses seeking debt finance from members of the public (maximum of $2 million per year). They do this by using the services of a business which runs an online facility that brings together businesses looking to obtain debt finance with members of the public who are looking for investment opportunities. Note that businesses which provide these peer-to-peer lending facilities must be licensed by the Financial Markets Authority to do so.
This service is not limited to small business owners. Anyone can register their loan request with a peer-to-peer lending service. The provider of this service will assess the request and determine an appropriate interest rate. Members of the public can then look through the loan requests and decide if they want to invest their money.
Debtor Finance
Some financial institutions provide types of ‘debtor finance’. That is, they lend on the basis of your outstanding invoices to customers. This type of service uses a business’s debtors as security – it may lend a business up to about 80% of the value of unpaid invoices they have. The business then gets the remaining 20% when the invoices are fully paid.
A benefit of this type of finance is that it relates directly to the amount of sales you have. Therefore, if your business has growth in sales and needs more working capital to fund this, more funds are available. In comparison, if you take out a loan or overdraft, this is for a fixed amount regardless of what sales income you expect to receive to pay the debt. The main disadvantage is it is usually only available to large businesses. For instance, BNZ only offers this service to businesses which invoices customers at least $3.5 million per year.8
There are two main types of debtor finance:
` Factoring: With this service, the lender loans the money and then generally assists the business to collect money from debtors. The debtors are therefore usually aware of the arrangement. Factoring is appropriate for businesses which sell to other businesses (as opposed to individual consumers) on credit terms. It is therefore not suitable for retail stores.
` Invoice Finance: With this service, the lenders often just lend based on the total value of debtors, as opposed to giving finance for individual invoices. Furthermore, the debtors generally do not need to be made aware of the arrangement as the business is still responsible for collecting payment (as opposed to the lender of the invoice finance).
In terms of the costs of using debtor finance, expect to pay around 5% (or less) of the value of your invoices. That is, it should not cost you more to use this service than it costs you to offer a normal prompt payment discount to customers.
Discussion Questions:
• Would you consider peer-to-peer lending? Why or why not?
• Are there any organisations in your area which offer low-interest loans to small businesses?
8 BNZ. (2021).
Part C: Other Sources of Funding
“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”
– Richard Harroch
Grants and Non-Monetary Assistance
The New Zealand Government, local councils, and other organisations may be a source of funding for new businesses. Some may also provide non-monetary support in the form of mentoring, training, and business incubators.
Incubators are a protective environment where young businesses are nurtured until they are able to thrive by themselves. Incubators also help accelerate business success. An incubator may include free business advice and services as well as access to investor networks.
USEFUL WEBSITES:
A few of the incubators in New Zealand are:
• CreativeHQ (Wellington) – www.creativehq.co.nz
• The Icehouse (Auckland and Hawke’s Bay) – www.theicehouse.co.nz
• Soda Inc (Hamilton) – www.sodainc.com
• ZeroPoint Ventures (New Zealand wide) – http://0.ventures
• Ecentre (North Shore, Auckland) – http://ecentre.org.nz
Figure 1 includes a list of organisations which provide grants and start up assistance. Some of these organisations are also a source of low interest loans. There may be further opportunities available in your own area through your local council or other organisations. For example, your local Economic Development Agency or Regional Business Partner organisation (https://www.regionalbusinesspartners.co.nz/) may have information about potential investors and sources of finance.
1: Other Sources of Funding and Support
Self-Employment Start-Up Payment
Business Training and Advice Grant
Provides new business owners with up to $10,000 (including GST) to cover the essential costs involved in starting up a business.
The grant gives potential business owners up to $5,000 (including GST) to cover the cost of business training, the development of a business plan, and advice before and during the startup period of the business.
https://www.workandincome. govt.nz/products/a-z-benefits/selfemployment-start-up-payment.html
https://www.workandincome.govt. nz/products/a-z-benefits/businesstraining-and-advice-grant.html
Flexi-wage for SelfEmployment
Modification Grant
Flexi-Wage
Poutama Trust
Provides financial support to someone while they are in the process of becoming self-employed. You can get up to $600 a week for up to 28 week, totalling $16,800.
Provides employers money towards covering costs of removing the physical barriers to employing someone with a health condition or a disability.
A temporary wage subsidy designed to encourage employers to employ people who are having difficulty finding a job. The employer pays the new employee market wages and claims some of the cost of this back from Work and Income.
Assists Māori businesses with funding and training. Provides grants on a 50:50 basis of up to $10,000 per year for a maximum of three years. Businesses must already have an annual turnover of at least $60,000 and have been operating for at least a year.
https://www.workandincome.govt. nz/products/a-z-benefits/flexi-wageself-employment.html
https://www.workandincome. govt.nz/products/a-z-benefits/ modification-grant.html
https://www.workandincome.govt. nz/products/a-z-benefits/flexi-wage. html
https://poutama.co.nz
Figure
Organisation / Scheme Description
Regional Business Partners
Offers growth advisers who help develop a plan for achieving business growth. Also may contribute up to $5,000 (on a 50:50 basis) to the cost of training programmes which improve the capability of business owners.
Te Puni Kōkiri Māori Business Growth Support Assists Māori business owners through the provision of information, advice, and brokering of relationships.
The Pacific Island Business Development Trust
Māori Women’s Development Inc.
Provides business support and growth grants for entrepreneurs of Pacific Island descent.
Provide business loans, training, and networks for Māori women and their whānau.
Website
https://www. regionalbusinesspartners.co.nz/
https://www.tpk.govt.nz/en/ whakamahia/maori-businessgrowth-support/
http://www.pacificbusiness.co.nz
http://www.mwdi.co.nz
Te Pūnaha Hiringa Offers the Pakihi initiative, which provides free workshops and mentoring support through Te Wānanga o Aotearoa and its partners –Aotahi and Crowe Horwath. pakihi.nz
New Zealand Trade and Enterprise
Callaghan Innovation
The International Growth Fund supports fast-growing export businesses as well as businesses in sectors and regions that have high export potential. This is on a 60:40 basis (the business must contribute at least 40%).
Provides research and development (R&D) funding to businesses and students.
https://www.nzte.govt.nz/ourservices/international-growth-fund
https://www.callaghaninnovation. govt.nz/grants
Arrangements with Suppliers
When you make purchases from suppliers and do not pay them straight away, suppliers are essentially providing your business with a form of finance. The longer the payment terms, the more advantageous it is for you.
Before purchasing items from a supplier, it is a good idea to check the payment terms. Some suppliers may require payment at the time of order (in advance of receiving any goods), others may require payment upon delivery of goods, and others may have terms such as ‘within 30 days of invoice’. A common payment term is ‘by the 20th of the month following invoice’. Terms such as this can be very beneficial to a business as it can effectively provide up to 51 days of free credit (or more, depending on when the supplier issues invoices).
For example, if a business received stock from a supplier on the 1st of May and received the invoice during the month of May, they would not need to pay that invoice until the 20th of June – 51 days after receiving the goods. Within that timeframe it may be possible for the customer to sell some (or all) of the goods received and use these funds to pay the invoice. In comparison, if a supplier required payment upon receiving goods, the business would need to use other funds for payment.
If timeframes for payment are short, it is best to negotiate with a supplier for alternative arrangements before placing an order. New businesses in particular may need to stagger payments until their cashflow is more established. There are creative ways in which supplier credit can be arranged, instead of simply extending the payment timeframe. For example, imagine a chef is opening a new restaurant. He/She may be able to negotiate an agreement with their suppliers before the opening of the new restaurant. Perhaps the supply agreement would state that no payments would be due for the first month’s supplies: instead, the cost would be spread over the subsequent three months’ invoices. This would allow the chef some free credit while the restaurant was becoming established.
Sometimes a supplier arrangement may happen inadvertently when a customer gets behind in payments. The supplier may have no option but to structure an arrangement by which the customer continues to be supplied while gradually paying off the debt. In other cases, some businesses use the free credit of their suppliers without any arrangement at all. As much as possible, it is important that new businesses avoid these situations. Even if the business never intends to order goods from that particular supplier again in the future, not making payment on time can cause considerable damage to the business’s reputation.
This damage can hinder the ability of the business to make credit arrangements with other potential suppliers. When a business orders stock from a supplier, it is common for the supplier to ask the business to complete a Credit Account Application which involves supplying several trade references. If a business does not meet their existing supplier’s credit terms, they will not be able to count on that supplier for a good credit reference for new suppliers. Therefore, even if you are able to negotiate later payment timeframes in advance of placing an order, ensure that you set cash aside whenever possible over the payment period to ensure you are able to meet your payment obligations.
Advance Payments from Customers
Whilst having a long payment period for suppliers is beneficial, a short payment period for customers is best for your business. In some cases, it may be possible to get customers to pay for goods in advance or to pay a deposit fee.
Some examples of situations where advance payment is likely to be appropriate include:
• A large order which the business would have trouble financing with their own money.
• A special order which the business would not be able to sell to any other customer if the customer changed their mind and decided they did not want the product.
• An order for a customer who is likely to change their mind and decide they no longer want the product / service.
• An order for a new customer who does not have a track record with suppliers.
• An order for a customer who has a poor credit track record.
• An order that would take a long time to complete (so that the business is not financing the sale for a period of months before the customer actually receives the final product / service).
Even if none of the above situations apply, if you have a good relationship with a customer, you may be able to arrange payment in advance. You may need to offer an incentive such as a discount, but this could work out as a relatively cheap source of finance for your business.
Discussion Questions:
• How did you finance your business start-up? Share your experiences with the group.
• Are you aware of any other grants available in your area (other than those covered in this seminar)?
• If you were starting your business today, would you approach financing your business differently? What sources of finance would you consider for your existing business?
Part D: Application Documentation
“Hope is not a financial plan.”
– Ric Edelman
Content of Application Forms
Below are three lists of details that investors and lending institutes may expect to be covered within a funding application.
Debt finance applications generally require answers to most (or all) of the following questions:
1. How much do you need to borrow?
2. What are the funds for?
3. Are you likely to require more funds in the future?
4. When do expect to start making a profit?
5. When will you be able to start paying the loan back?
6. What is your own contribution?
7. What assets do you have available to secure the loan?
8. What is your existing debt?
9. What is the ownership structure of the business?
10. Is the business a franchise? If so, which one?
11. Who is in your management team and what experience and expertise do they have?
Usually supporting evidence is required. Examples of such evidence may include:
• A business plan which includes financial forecasts
• Copies of past financial statements
• An independent valuation of assets
• A statement of your personal financial position
• A personal monthly budget
• Proof of legal and accounting advice
• Evidence of market research which demonstrates an understanding of your market and demand for your product or service
• Evidence of an external analysis being completed to show you understand the industry and competitors
• A copy of any leases or contracts
• Verification of personal income from other sources
• Insurance policies (business insurance, life insurance, income protection and house and contents insurance)
Equity finance applications generally require all of the above details and, in addition, will require information regarding intellectual property protection, legislation and regulations affecting the business, and research into key international markets to show export potential.
Often, it is the attitude, personality, and competence of the business owner that determines whether someone is willing to invest in, or lend to, the business. This is particularly the case for angel investors who are investing a large amount of their own money. Another important criterion is whether the business has a strong point of difference in the marketplace. Reasons for not proceeding with an investment opportunity include excessive risk, the business not matching the investor’s investment criteria, the business plan not being up to standard and a lack of experience or expertise.9
What Information Should I Emphasise?
Most organisations have a standard lending or investment application form so there is little opportunity to highlight information on the form. However, your business plan gives you the opportunity to emphasise the information you want to be seen.
When presenting a business plan, always include an Executive Summary. This is at the front of the plan and highlights the key information inside. If the person considering your application is busy, they may just skim through your plan and miss key information. The Executive Summary allows you to present the most important points in a form that is more likely to be seen.
The key point that lenders and investors are looking to establish is whether it is worth taking the risk on you. It is therefore vital that you emphasise the information which gives them the most confidence in your business.
This key information includes:
• your ability to repay a loan on time (if you are borrowing money),
• when you will make a profit and when an equity investor can expect to receive dividends,
• your point of difference,
• evidence of demand for what your business is offering,
• your experience / expertise in your chosen field,
• details of your management team,
• capacity to handle growth (in terms of physical space, equipment, and personnel), and
• your commitment to the business.
9 Nugent. (2015).
Financial Forecasts
Investors are always interested in the financials of the business. They want to check that your business is viable and their investment is within their risk profile. Thus, both past statements (where available) and forecasts should be supplied. Financial forecasts are covered in the Financial Planning seminar. However, the main two types of forecasts you need to supply are:
1. A forecasted Statement of Financial Performance
2. A cashflow forecast
The forecasted Statement of Financial Performance contains your projected sales and expenses, along with the amount of profit you expect to make. It is best to include forecasts of this statement for different time periods, especially if you do not expect to make a profit for the upcoming year. A common option is to supply a forecast on a month-by-month basis for the next twelve months, along with an annual forecast for the next three to five years.
A cashflow forecast is a projection of how cash will flow in and out of your bank account over a period of time. It predicts inflows, such as when your customers will pay and when money will be invested into the business, and outflows, such as when you will pay your bills and when capital purchases will be made.
The importance of a cashflow forecast is that you need to know, at any given time, how much money you have available to keep the business going, and whether you will be able to pay debts when they are due. You may be making a sizable profit but this does not mean that you have money in the bank to pay the day-to-day expenses involved in running a business. Basically, whilst a forecasted Statement of Financial Performance shows whether a business is expected to make a profit, it is the cashflow forecast which shows whether the business is likely to be able to remain in operation long enough for this profit to be made.
Another forecast which may be required is a forecasted Statement of Financial Position (also known as a ‘balance sheet’). Even if a forecast is not required, a Statement of Financial Position which shows the current state of your business is likely to be requested. The Statement of Financial Position outlines your assets, liabilities and owners’ equity in the business. In accounting terms, the total value of your assets equals your liabilities and the equity in your business (Assets = Liabilities + Owners’ Equity).
Instead of simply presenting an investor or lender with one set of financial forecasts, be upfront and show them several scenarios of what could happen. This should include the ‘best case’ scenario, the most realistic scenario, and the ‘worst case’ scenario. Although you will not want them to focus too much on your ‘worst case’, it is best to be upfront about it. Investors are likely to be suspicious if you only show them what you think (or hope) the financials will be, and this may even be a reason for them choosing not to invest!
Also consider that, if funding is received and the ‘worst case’ happens, the lender or investor is likely to be much more understanding as they were made aware of the possibility of this right from the outset.
TĪWHIRI:
Include explanations with your forecasts to justify the figures you have provided. Anyone can prepare a forecast which shows a healthy profit and bank balance, but it is the rationale for the figures that investors and lenders will be most interested in. They need to be able to judge for themselves how realistic your forecasts are – providing explanations (also known as ‘assumptions’) allow this.
Discussion Question:
• What evidence could you provide a funder to support your claims about expected demand for your products and services?
Part E: Meeting with a Potential Investor / Provider of Finance
“The pitch deck is arguably the most important single document you will generate in the life of your company.”
– Bo Yaghmaie
The process of applying for finance often involves the investor or lender going through the following four steps:
1. Initial screening. The lender will quickly look at the application to check it meets basic criteria. Therefore, be sure that you are aware of their criteria for investing or lending, and you have clearly shown you meet this criteria. If it is not clear that you meet the criteria, it is unlikely the funder will progress to the next stage.
2. Evaluation of the business plan and evidence. It is at this point the funder will take the time to read through all the information you have provided them with. If they like what they see, you will typically be invited to meet with them and give an oral presentation.
3. Verbal presentation or meeting. The funder will request to meet with you and may request that you deliver a presentation. At this point, it is critical that you have prepared a sound business pitch and have practised delivering it. Remember, confidence and attitude are extremely important.
4. Final evaluation. Before committing to the investment, the funder will usually conduct some further analysis and consult with other stakeholders. For example, they may do their own due diligence to check that the information you have provided them with is likely to be correct.
The Verbal Presentation
It is unlikely that you would receive funding from a lending institution or investor without meeting them personally. Being able to verbally present your application should be regarded as an opportunity as it gives you the chance to make a personal connection and to answer any questions which may have become stumbling blocks to the application.
The key to a funding presentation is to be prepared. You must know all the pivotal information about your business inside out. Ensure you are familiar with all the answers to the questions outlined in the application section above. Your appearance is also very important. You are likely to be applying for a substantial amount of money so ensure that you look professional and well groomed. First impressions do count. Do not get defensive or angry if you are asked difficult questions. A meeting with a bank manager is unlikely to be as rigorous as that of a venture capitalist, as the latter is taking far more risk.
In the ‘Proposals and Tenders’ seminar, we considered some tips for doing a verbal presentation. These are included again below:
• Be well prepared. Know your audience, ensure you know how to use your equipment, and arrive early.
• Dress professionally. Your appearance matters, so be careful not to overlook basic details such as ironing your shirt and ensuring your shoes are not muddy.
• Practise your presentation - especially in front of an audience.
• Prepare a handout and distribute copies to your audience before you begin.
• Ensure you have a clear unique value proposition, and make this evident to the audience.
• Focus on the customer. Demonstrate that you understand their needs and show how you can fulfil them. Clearly outline the benefits to the client of working with you.
• Use visual aids such as PowerPoint slides, but have a contingency plan if there is a technical problem. Do not clutter your PowerPoint slides, and never simply read from them! Instead, use these slides to emphasise or illustrate the main points.
• Take along a support person who can give you moral support and help you with demonstrations and equipment. This could include key people from the team who will be working on the project. If you are giving a technical presentation, take along an expert who can answer technical questions.
• Ask the audience if they have any questions. Do not be afraid to say you do not know if unable to provide an answer. It can also be useful at the start of the presentation to give the audience a guideline of when you would like them to ask questions. For example, do you want them to ask questions whenever they have them throughout the presentation? Will you pause after each part of the proposal to invite questions? Or will you give time at the end of the presentation for questions?
NGOHE:
Put together a three minute ‘pitch’ designed to raise finance for your business. Deliver this pitch to your peers, who will pretend to be equity investors, lenders, or in a position to be able to offer grants. Make sure your pitch highlights the information the funders are likely to want to hear.
The funders (your peers) will then have the task of deciding whether they would provide finance to your business and explaining the reasons for their decision to you. If time permits, they may ask you questions. Before it is your turn to pretend to be a funder, check that you are clear about your criteria for providing finance, so you can ensure any questions you ask your peers are relevant.
Discussion Question:
• Have you met with a funder when applying for finance before? If so, what information was the funder most interested in?
References
BNZ. (n.d.). Invoice Finance. https://www.bnz.co.nz/business-banking/loans-and-finance/cash-flow-solutions/ invoice-finance
Ministry of Business, Innovation and Employment. (2017). Te Pūnaha Hiringa: Māori Innovation Fund. http://www. mbie.govt.nz/info-services/infrastructure-growth/maori-economic-development/maori-innovation-fund/ commercial-advisors-scheme
NBR.co.nz. (10 November 2009). Stephen Tindall Appointed NZ Archangel. https://www.nbr.co.nz/article/stephentindall-appointed-nz-arch-angel-114738
Nugent, B. (7 August 2015). What Do Angel Investors Want from an Inventor? https://www.theicehouse.co.nz/whatdo-angel-investors-want
NZ Herald. (4 February 2016). Meet Jamie Beaton, the 20 year-old Worth $40 million http://www.nzherald.co.nz/ business/news/article.cfm?c_id=3&objectid=11584179
Statistics New Zealand. (20 March 2018). Business Operations Survey http://www.stats.govt.nz/infoshare/ Default.aspx
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This publication was urevised in October 2021.
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