Blog Post

27 Sep
By: root 0

HOW TO MAKE YOUR BUSINESS ATTRACTIVE TO INVESTORS

One challenge for any business that is ready to upscale, or which is seeking investment finance, is how to make themselves attractive to a potential investor. As the vision carrier, it is paramount for the entrepreneur to find the most opportune time for this, depending on whether the investment is for short-term or long-term needs.

Investment in a business can come via equity financing which is the process of raising capital through the sale of shares in a business. Alternatively, and most commonly for SMEs, is debt financing which means borrowing money for a specific purpose, to pay back with interest and within an agreed period.

KEPSA in its ongoing Covid-19 Recovery and Resilience Program – designed to empower businesses and entrepreneurs – held an online seminar for SMEs on this very topic on Friday 24th September 2021. Attended by over three hundred participants, the session, hosted by Ms Sally Gitonga, Director, Investments Portfolio at AECF. The AECF is a development institution that supports businesses to innovate, create jobs, leverage investments and markets to create resilience and sustainable incomes in rural and marginalized communities in Africa.

SMEs tend to struggle with investment financing due to challenges such as lack of collateral, a high cost of appraisal of the business or even the high cost of investment needed. Sometimes a limited upside for the investor might also make financial investment an elusive pursuit.

Ms Gitonga, with over 20 years experience in investing in SMEs noted that there are four main things that financiers want to see when scoping out investment opportunities in a business. These are:

A viable business model

It is important for the SME to clearly outline the amount of funding needed and the purpose, including how much one is willing to put in as the business owner. This should include the working capital cycle – which refers to the amount of cash the business can generate in the short term – to ensure monthly operations. This will often be decided by three factors:

1. How long it takes you to receive cash from clients for services or goods sold

2. How long you have been given by your suppliers or creditors to pay them

3. How long it takes for you to turn over stocks or push products in the market.

Ms. Gitonga noted that there was a huge demand for limited funds especially now, due to the unique business challenges brought on by the Covid19 pandemic. As such, SMEs must present a viable and bankable business model to a potential financier.

“The path of the investor into your business will start at the appraisal stage and this question will come early in the conversation. For this reason, it is important to always pump back any income back into the business.”, said Gitonga.

A driven and committed entrepreneur with high integrity and the ability

One way of showing commitment as an entrepreneur is via ensuring the business is solvent at any point in time. In this regard, prudential cash flow management will inform the gaps where the financier can help.

The source of the funds and ability to repay back the investment will factor into the SME’s credibility standing and hence the financier’s overall decision whether to invest or not. Even in situations where one can supply a collateral item, it is wise to note that the item will not pay for the investment. If the business cannot achieve a certain amount of revenue every month, to comfortably meet its borrowing obligations then one would rather request a lower line of credit.

“Whereas the secret to survival for an SME or a start-up is often to bootstrap by not inviting or saddling the business with unnecessary expenses, seeking additional training and capacity building in an area of weakness can help position and endear the entrepreneur to the financier”, said Gitionga, adding that this shows willingness to grow and gain skills that will benefit the business on the part of the entrepreneur.

A well-documented business plan

For many SMEs, often considered high-risk, poor record-keeping of their attendant business processes, especially cashflow management is largely to blame. This is a critical point to note since the amount of investment and tenure of said investment, will often be pegged on the risk profile of the business.

A well outlined SWOT analysis and how it factors in the investment or financing needed is crucial in attracting a financier. It is not uncommon to be asked about the social and environmental impact of the business as environmental sustainability can impact the business’ viability.

The financier will also be keen to see the industry and market risks. It is therefore important to keep up with the trends as an SME to show the financier that you are taking advantage of all opportunities for your business. This is attractive to an investor especially if you are innovative and creating the opportunities for yourself as opposed to just responding to normal demand and supply triggers in the market.

Clear outline of the business history.

Another important aspect of attracting investment is the SMEs ability to articulate their business history. Being enthusiastic about the enterprise including moments of compelling inspiration, perseverance and courage in the entrepreneurial journey can be a turning point for a potential investor. Proper messaging around the corporate milestones can be important cornerstones for the brand.

During the investment pitching process, capturing significant achievements and wins along the way and the unique aspects of the business such as patents and long-term contracts among other positive highlights can boost a financier’s confidence in investing in the business.

Owning this narrative will therefore show the investor how in-depth and immersed one is in the business and which can foster trust and play well at the negotiation stage. At this point, it is important to be able to show the tangible business strategies that you have put in place in pursuit of the set business goals and even the reason for seeking investment.

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