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Learn Strategies in Convincing People to Loan You Money for Your Startup

The funding problem is one that all entrepreneurs face. Without money to start your business, your options are very constrained and growth could take eons longer than it would with the help of an investor. If you don’t have the means to self-fund, you should begin polishing your pitch to investors immediately, but without proper etiquette and requisite plans you could come off looking desperate and unprepared. The following tips will help you look more credible, serious, and promising to potential funding sources.

Build a Prototype

Let’s face it: talk is cheap. Anyone can have a “great idea” that sounds like a real winner on paper, but no amount of talk is ever as impressive as using the real thing. TechRepublic warns against spending too much time and effort on the functionality of the prototype. They recommend that a prototype should be an empty shell of an application that does little more than visually represent your current vision.

The purpose of the prototype is to get it in front of your prospective investors fast and let them critique it. If you invest too much time in programming the technical back-end, you might end up having to scrap a lot of your work when the investor submits changes he or she want to see before writing you a check.

Identify a Clear Target Market

Too often investors meet people who have grandiose new ideas that they are sure the world will want, but can’t specify who in particular will use it. Believe it or not, a product without a market is like a rowboat without oars – practically useless. Investors know it, too. “It’s a big red flag when someone outlines the size of the market-multibillion dollars-but doesn’t clearly articulate a plan for how the idea will meet an unmet need in the marketplace,” says Aaron Keller, an adjunct professor of marketing at the University of St. Thomas.

Dedicate a significant amount of time putting yourself into the shoes of your future customer. What problems do they have? How does this product solve them? How can you communicate the value of your product to them? Understand as much about your market as possible and communicate this knowledge to your investor.

Seek Help with Your Business Plan

If you plan to seek funding from a professional investor (such as a venture capitalist, or a small business bank loan) you will need a dynamite business plan before you even walk through the door. No amount of crafty salesmanship or product hype will get the job done with these folks – they’ve heard it all before. The problem is that you’re not a professional business plan writer, you just know your product and want to get started developing it.

That is why the Small Business Association (SBA) offers free online business plan consulting. Their toolkit offers everything you need to complete an attractive business plan quickly, from essential inclusions to formatting guidelines. There is even an interactive online workshop to help you ensure that you learn all the tricks and tips for writing to investors.

Define Your Team’s Roles and Credentials

Behind every great company is a talented team that can combine specific skills to create the magic that drives their sales. Investors know that the success of a new business is as much about the people turning the wheel as it is about the wheel itself. Before seeking funding, write a brief biographical outline of the credentials and roles of your core team members, making sure to include all professional certifications, work experience, and educational merits that apply.

Design Clear Return on Investment Figures

An important component of your business plan that every experienced investor needs to see is your return on investment outline. Specifically, this section explains how the investor stands to benefit from your company. What percentage of profit is he or she entitled to, how soon do you expect to reach profitability, and how long will it take him or her to gain their investment total back? Considering that these are likely the biggest questions on the mind of anyone you ask for money, it is important that your ROI figures are backed by research and show a positive outcome for the investor.

Decide On Your Exit Strategy

New entrepreneurs are so excited to begin their businesses that the concept of an exit strategy is usually the furthest thing from their minds, but it is an important aspect that deserves attention. For those unaware, an exit strategy is how you plan to leave your business in the future. Some envision a life-long company that they will work at until retirement while others plan to build the business up and sell it off for a big pay-out.

It’s tempting to put off this decision for later, but StartUpNation points out that the exit strategy can actually shape the business right from the start. “If…you plan to exit your business and transform your equity into cash through a sale, merger or IPO, you need to prepare for that every step along the way,” they explain. “You’ll need to build value and equity in your company by creating unique products, services, relationships and distribution channels, building an intellectual property portfolio and expanding your customer base.”

Try Approaching Friends And Family First

Often, when entrepreneurs think about funding, their mind immediately focuses professional investors and neglects an alternative possibility. Before calling the bank, consider talking to your friends and family about investing in your company. Consider that you have a reputation with the people closest to you, and they surely want to see you succeed. New investors are fine, but they are a much harder sell because they see you strictly as a business proposition.

Tonia Papke, president and founder of MDI Consulting, agrees. “Family and friends are great sources of financing. These people know you have integrity and will grant you a loan based on the strength of your character.”

Justify Every Dollar of Capital

Deciding on an amount to ask for is one of the most difficult steps in planning funding. Carl Showalter, founder of an early-stage venture capital firm known as Opus Capital says that proposing a reasonable amount of funding is a skill many new entrepreneurs lack. “It’s surprising how often I meet with first-time entrepreneurs who tell me they need $5 million. Not many companies need that amount in their first round of funding.”

If you want to increase your chances of getting the money you need, keep the estimates conservative and justify every dollar. Never name a high figure just because it sounds like you’d be financially set for a while, this is inappropriate. Instead, create a comprehensive expense report that explains exactly how the money will be used to grow the business.

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