Choice of option: loan or share
Equity financing is less profitable for an entrepreneur than debt financing. After all, in the second case, you receive a flow of investments in a small business or a large company at a certain interest rate and for a specific period. Having repaid the loan, you become free from obligations. In the case of equity financing, you will have to pay part of the profit to the investor for many years.
When deciding to attract an investor to your share, try to look not just for money, but for a mentor who is competent in your field. Such a person or company will be able to provide you with consulting support and help you establish the necessary connections.
Development of conditions for the investor
If you decide to attract borrowed capital, the terms are usually determined by the lender. When formalizing such an investment in a business, the agreement is drawn up in accordance with the ideas of the one who provides financial support. Then the entrepreneur decides whether to agree to the proposed terms or not. At the same time, he must understand the safety margin of the business. Otherwise, you can drive the project into a debt hole.
First, you need to understand how much the business brings in on average per year. Second, how many assets are on the business's balance sheet: equipment, raw materials and finished goods, cash, accounts receivable, that is, debts to you from third parties.
Determining an acceptable interest rate for a loan
For this purpose, the ROA indicator stockholder data package is used, which shows the profitability of business assets. In other words, this indicator serves as a measure of the company's efficiency and shows how much profit the business receives from each ruble spent on the formation of its assets.
To calculate ROA, we take the average value of the company's balance sheet for the year: the sum of the value of assets at the beginning and at the end of the year, divided by 2. Then we divide the company's annual profit by the resulting number.
Final formula:
Return on Assets (ROA) = Profit for the year / ((Assets at the beginning of the year + Assets at the end of the year) / 2) × 100%
Let's look at an example. Let's imagine a hypothetical online store with the following balance:
At the beginning of the year At the end of the year
Stock of goods in the warehouse 3,000,000 rubles 3,000,000 rubles
Money in the current account 500,000 rubles 2,500,000 rubles
Advance payment made to the supplier of goods 1,500,000 rubles 1,000,000 rubles
Total assets 5,000,000 rubles 5,500,000 rubles
Average value of assets for the year: (5,000,000 RUR + 5,500,000 RUR) / 2 = 5,250,000 rubles.
Let's assume that the store's annual profit for the year was 2,500,000 rubles.
Then the return on assets of this business will be equal to: 2,500,000 RUR / 5,250,000 RUR × 100% = 47% .
The result obtained can be interpreted as follows: each ruble invested in the company's assets brought 47 kopecks of profit.
Once we have calculated ROA, we can calculate whether the company can afford to take out a new loan.
Let's say it is given a loan at a rate of 25% per annum, that is, the organization will be forced to return 25 kopecks per ruble per year to the bank. With an ROA of 47%, the business can afford such a loan, because it still has: 47 − 25 = 22 kopecks of profit.
But if the annual profit of the online store was not 2.5 million rubles, but 1 million rubles, the return on assets would decrease to 19%: 1,000,000 RUR / 5,250,000 RUR × 100%.
The business will no longer be able to afford a rate of 25% per annum, since for every ruble of borrowed capital after paying interest to the bank there is a loss: 19 − 25 = −6 kopecks.
If the business is stable, the initial data for calculating ROA is taken from the profit and loss statement. For a startup, a financial model is created with the most conservative forecasts.
Download a useful document on the topic:
Checklist: How to Achieve Your Goals in Negotiations with Clients
Tips for Preparing an Investor Presentation
Presentation is a well-proven method of presenting data that produces excellent results. It is successfully used in many areas: from term papers to demonstrating a new product on the market. Visual presentation, accompanied by clear and concise comments, allows you to build a marketing speech as accurately and clearly as possible, emphasize the benefits and reduce the impact of negative factors.
The presentation of the material is focused on the human factor as much as possible. The data is presented in such a way as to establish visual contact with the audience. The content is determined by the entrepreneur himself based on the advice of professionals, marketers and managers. But there are several key points that must be included.
Introduction . Here you should include not only general information, but also a slogan – a catchy phrase that evokes associations with the company.
Argumentation . You must prove to your partners that your proposal will bring them success, fight objections, give logical arguments that they can fully understand.
Text . It is better to make a couple of slides without visual accompaniment. Then they create the impression that the information on them is essential.
Strengthening . This point is especially important