The Differing Needs of Lenders and Investors

Ernst & Young recently conducted a survey of 1000 entrepreneurs – more than 2/3 of them found it difficult to secure the funding they need to grow.

Funding can be divided at the most basic level into Lenders (loans, asset finance & invoice finance) and Investors (equity). Lenders loan a business money for a period of time and look to get repaid with a return. Investors are looking to buy a piece of your business in return for long-term capital gains when the price of your business’ stock increases.

Many entrepreneurs fail to secure funding because they fail to distinguish the motivations of these different types of funders.

To generalize, lenders are not interested in your long term vision for the business. They are solely concerned with risk management and the ability of your business to repay the credit that they have provided for you.

To maximize the likelihood of securing finance through a lender, you must have a financial plan that will allow for debt repayment and must have assets that the lender can take as security in the event that you default on repayments.

Investors are tougher to generalize as they come in all shapes and sizes with different expectations and motivations. We can subdivide equity investors into Angel investors and Venture Capital investors to make this murky water a little clearer.

Angel investors prefer to invest in businesses that can quickly get to cash flow positive, whereas VCs seek businesses that can grow very quickly and become very valuable.

Both Angel investors and VCs are looking for an exit strategy – this means they want to sell their share of the business at some point to turn a profit. For this reason, if your business is a lifestyle business, i.e. you’re planning on running the business for the rest of your life, then Equity investment is unlikely to be appropriate.

So the lesson to learn here is to be clear on your goals for the business and only approach those funders whose goals are well aligned with your own. For some this may point towards Equity and for others Loans. There is no right answer as every business is different. For tips on what type of funding may be most appropriate for your business, take a look at http://www.businessfunding.co.uk/services-item/.

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