Importance Of Raising Funds
Raising Fund for a project seems to be one of the most complicated and difficult task to be successfully completed. It is the core or the essence for realization of a project. A proposed project will be unable to take off if the principal or the promoter of the project fails to raise the required funds for the project.
Funds seems to be the core for any project to manifest. The vast majority of commercially viable projects fail due to inability of the principal to raise the required funds. This means that funds are the life line of any project. In reality, failure to raise the required funds for a proposed project means failure of the project itself.
Funding From Perspective Of Lenders
From the perspective of a lender (investor or financer), funding usually turns to be a business opportunity which comes attached with risk. In other words, Funding means an opportunity for them to make more money or loose their money.
As lender business is providing funding facilities for businesses; they need to seek for viable projects to be funded in order to continuously be in business. However they are also exposed to danger of fund failing project, which would results in losing their money and eventually end up to be out of business.
It is lender's priority to ensure that the investment is secured and the possibility of losing their money is almost nil. No lender is interested to loose their hard earned money at any cause. They will only accommodate funding opportunities in the market as long as their funds have absolutely no risk concerning repayment which is tantamount to not funding non-collateral able or unsecured ventures.
So, the lender will only consider looking at your proposal unless they are sure that the proposed project can generate more money for them without much of their capital.
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Basic Elementary Funding Criteria
Lender inherents the responsibility of ensuring that the risk involved in a project (seriously considered) to be funded by them is substantially minimized if not totally eliminated. They have developed a set of strategies or Basic Elementary Funding Criteria to measure the risk associated in funding a project. This approach is conducted in order to study the borrower, business, funding and circumstances surrounding the loan and business.
The information provided below are the strategies that are usually applied by most Investors or Financers in order to examine a funding request:
The individual exposure and understanding of the market and industry in which
they will be competing.
Does the borrower have industry contacts? and know the industry players?
Does the individual have experience in starting and running a business?
Does the individual display characteristics of honesty and integrity?
Borrowers should present themselves as upstanding, responsible members of the community and be able to back-up this claim with references.
- Transparency: Borrowers also need to show they can be trusted to be up-front and transparent about problem areas.
- Commitment: Is the individual committed to the business ventures and willing to do what is necessary to make it successful and repay the loan?
- Track record:
Does the individual have a track record of successfully starting new businesses
or did past attempts fizzle?
Does the borrower have a track record of loan repayment?
- Track record:
(For existing business)
what has been the financial track record of it over recent years?
Does the business model seem viable and profitable? Have sales increased?
Has equity grown?
Can the business take on additional debt and maintain a reasonable debt-to-asset
Is the business positioned to adequately meet its loan repayment requirements along with covering other financial demands of the business?
- Industry: The state of the industry in which the borrower will operate is also important to the lender.
Is it a new and expanding industry or a mature and stable one?
The lender will be interested in who your competitors are and your strategies for competing with them.
- General economy:
What are the conditions of the general economy at the time of the loan request?
What is the projected state of the economy for the coming several years? (during repayment period of the loan)
Are there societal trends that will affect the viability of the business and loan repayment capacity?
Will impending regulations create problems?
- Returns: Will the use of the loan funds create sufficient returns (cash flow) to repay the loan? Remember that the returns must first cover all of the costs associated with the project or investment before funds are available for loan repayment.
- Budget: You need to create a cash-flow budget to show how the investment will create sufficient cash flow to meet the loan principal and interest payments.
- Timing: It is important that the timing of the cash flows correspond to the loan repayment schedule.
- Documenting: If the loan will not create an income stream, describe and document how the loan will be repaid.
What can go wrong with the investment?
What is the probability that something will go wrong?
Is the business sufficiently capitalized to handle risk?
What risk management strategies are available to help mitigate the risk?
Are there contingency plans in place to mitigate risk?
Are there any alternative sources of cash from which payments can be made?
- Lenders often want protection in case of default on the loan by the borrower.
- The lender may use the property being purchased as collateral for the loan.
- Additional collateral may be required as well as a personal guarantee by the borrower or other representative.
Lender will conduct a test on each funding application against the criteria above to determine the overall soundness of the proposed project. In order the funding application to be considered seriously, the Lenders need to be comfortable with the combined strength of the borrower in regards to the criteria as a whole.