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Most business owners follow the wrong approach in raising finance, says Adriaan Esterhuizen, founder of the Business Model Design Company (BMDC).
Financial institutions turn down applications for many reasons and those who seek finance should find out what the financier expects.
Esterhuizen says many business owners mistakenly believe that they only need a business plan to secure funding. They consult business advisers then modify a generic business plan with their company's information, he says. But these business plans are not directed at a specific financial institution, which is the source of a common problem.
Different institutions use different assessment criteria. He says factors such as the company's management structure, its location and the collateral it can provide are important in determining if it gets the finance.
Esterhuizen has helped many entrepreneurs raise finance and knows what financiers want.
"They are looking for a maxi- mum three-page targeted investment proposal that basically tells them: 'This is what I want, this is how I am going to pay you back and this is what's in it for you'."
Most business owners miss this point. Other pitfalls include a lack of clarity about skilled people in the business, operational capacity and the way the market feels about the product.
You can have a powerful product but it won't help you if it does not appeal to the target market. Financiers need to see that you have the skills and capacity to deliver and that there is a need for your product.
Many applicants also exclude successful businesses when analysing competition. But if you mention few competitors, you create the impression that your target market is too small to support many businesses.
Your track record is important. You impress potential financiers if you can prove that you have done it before.
Many entrepreneurs fail to mention their experience in the market they intend to enter. Do not rely on the management skills listed in your CV because general skills do not depict the expertise needed for a specific business.
Most entrepreneurs misjudge the size of their market. They concentrate on the overall market and avoid identifying the size of their sector within it.
Avoid stock business-plan templates that do not deal with the investor's criteria.
Tailor your business plan for a specific investor, because one size does not fit all in the finance market.
Research the best possible investment rather than apply for finance indiscriminately, which tells the investment market that you did not do your homework. You must be able to show financiers why you think the chosen investment is best for all the stakeholders. Determine what went wrong if an application fails rather than pointing a finger at finance institutions. They don't just turn applications down, but follow criteria when they allocate funds.
Your success will be governed by the research you do.
lInformation in this article comes from Succeed magazine.