Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my interview with @bizplangirl. Cheree Warrick writes business plans for companies seeking funding from banks and angel investors. Her book, “Creating Business Plans that Actually Get Financed” helps entrepreneurs understand how to write great plans. For more info, visit www.theprofitpartner.com
SmallBizLady: How much funding is given to small businesses every year?
Cheree Warrick: Banks, angel investors and venture capitalists invest more than $200 billion per year in start-up and early state companies (companies less than 5 years old) annually. In 2013, 5.1 million small businesses received over $233 billion in funding.
SmallBizLady: I often hear the term “angel investor.” What is an angel investor and how can I find one?
Cheree Warrick: I start my explanation of the term “angel investor” with the understanding of bank lending. Banks are concerned about your credit, collateral and cash flow. In order to receive a bank loan, you must have all 3 of these items. An angel investor is not concerned with your personal credit or collateral. If you can’t pay them back on a monthly basis, they’re willing to accept return of funds in 3-5 years. If the company fails and they lose their money, they most likely will not take your personal residence. But don’t take angel investment lightly. You must have a plan for growth and the return of their capital.
SmallBizLady: I often hear the term “crowdfunding.” What is crowdfunding?
Cheree Warrick: When I was growing up, my grandmother’s church had a Building Fund. The church wanted to make some major repairs and the Building Fund was promoted and used for that purpose. Crowdfunding is the same thing – except people use online platforms (ie Kickstarter, Indiegogo, etc) to fund many types of projects and ventures from a local baker who wants to purchase a new piece of equipment to the famous R&B group TLC who raised $150,000 in order to fund their new album.
Instead of 1 angel investor giving your business $150,000, many people contribute $5-$50 each in order to fund your business’ growth.
SmallBizLady: What are banks and angel investors looking for within business plans?
Cheree Warrick: They want answers to 6 key questions –
- What is the Market Opportunity (or what problem do you solve within the market)? How many people within the market place and how many can you potentially serve?
- How does this company make money? Is it easy for me to understand the revenue model of this entity?
- What is your plan to acquire, convert and retain customers long term? Formerly known as a Marketing Plan, investors want to know how they will get PAYING customers through the door.
- Who is on your management team and how do I know they can help the company reach its goals? The #1 reason business plans aren’t funded is because the management team is not strong enough to persuade the investor to part with his or her money.
- Are the financial forecasts and assumptions reasonable? When will this company be profitable?
- How will my funds be returned? Banks want their payments made every single month. Angel investors want to know how and when their funds should be returned and the expected Return on Investment.
SmallBizLady: I’m not looking for capital. Do I still need a business plan?
Cheree Warrick: Yes; however, you can create a one-page business plan. Many times, just thinking through a few key questions can help you set your path to profitability.
SmallBizLady: I often watch the show Shark Tank. Why are some companies successful at getting funding and others aren’t?
Cheree Warrick: Have you ever wondered why some businesses on Shark Tank receive no interest while others have all 5 sharks fighting to invest? One of the stars of Shark Tank, Kevin O’Leary, gave a speech at Notre Dame. He stated that the companies with the following 3 characteristics are the ones who receive capital:
- They have an easy to understand business model and vision for the company
- The Sharks believe the management team can truly help bring that vision to life
- The team is able to answer financial questions without hesitation
SmallBizLady: How do I create a powerful Executive Summary?
Cheree Warrick: Many investors will not read your entire business plan; therefore, your Executive Summary must do some extremely heavy lifting. After you’ve written your business plan, sit down and spend 5-10 hours writing your 2-3 page Executive Summary. It takes a minimum of 3 revisions and edits to get it right.
SmallBizLady: What should I include in my Marketing Plan that lets investors know I’m a great business to fund?
Cheree Warrick: The best marketing plans show investors how sales were done previously, what’s been most successful, and how we’ll take what’s successful and grow it exponentially. I recently spoke with an entrepreneur who’s invented a new product. I told her to sell 1000 units and then come back to me to raise capital. Why? Because after she’s sold her first 1000 units, we’ll be able to ascertain the most effective marketing methods she should use to grow from 1000 sales to 10 million sales.
SmallBizLady: What operational information must I include in my business plan?
Cheree Warrick: If you are manufacturing a product or starting a restaurant, including some operational information in your business plan is smart. You can include technology information, inventory rules, or import/export processes. I’ve also seen Operational Manuals used as Appendices. Including operational information lets your investors know you understand the process of running your company.
SmallBizLady: How can investors tell if my financial forecast is professionally done?
Cheree Warrick: After reading your Executive Summary, the next item investors review is your financial forecast. If you have a seasonal business (i.e. you sell an item that’s mostly purchased as a gift), you need to have the majority of your sales in the 4th Quarter during holiday season. If you are hiring employees, you must include payroll taxes, benefits, equipment and computers for their use. Savvy investors know how to identify what information is missing from financial forecasts. They don’t invest if information is missing.
SmallBizLady: How much time must I devote to writing a business plan?
Cheree Warrick: It often takes between 40-60 hours to write a compelling business plan. One page business plans take 8-10 hours because you’ll research and strategize about your business.
SmallBizLady: How can I make the business plan writing process less painful?
Cheree Warrick: Here are 3 things you can do to make the process less painful:
- Start with a detailed Table of Contents & outline. Remember when you were in high school and had to write a term paper? The best process was to begin with a detailed outline. The same is true for a business plan.
- Give yourself time to write a good document. Many people try to write a 30 page customized business plan in one week. The information will be incomplete and you won’t be successful at producing a quality document.
- Hire an editor to assist with grammar corrections and make your plan look “pretty”.
Spend the majority of your time focused on the content within the document.
If you found this interview helpful, join us on Wednesdays 8-9 pm ET; follow @SmallBizChat on Twitter. Here’s how to participate in #SmallBizChat: http://bit.ly/1hZeIlz
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.
Love this post and the clarifications I get on crowdfunding! I think the most difficult part of putting a business plan into action is finding the right investors and engaging them in developing your project!
That is the hardest part, Vanessa. But it helps to be organized with a solid business plan.
-Melinda
Whilst I’m a big fan of well researched and thought out business plans, I think that a little experimentation and real life investigation goes a long way.
Perhaps laying out one or two of your key assumptions and then testing/challenging them is an easy way to start?
All these information are significant for small businesses or those who are about to start their own business venture. I mean, finance is very important in any business. First of all, how can you start the business if you don’t have enough budget for it. And the way to acquire finances of course, is to get some help from concerned individuals but you need to show a good and effective business plan first before they can trust you with it. Thanks for sharing all these important information with us.