The prime source of financial aid for businesses comes from external funding. In the early days, enterprises venture out with little personal investments and loan the significant chunk from financial institutions until the internal cash flows are strong enough to support independently. When seeking funding options, a business should consider investment criteria to build up a strong case and receive the desired funding quickly and in a shorter span.
What are investment criteria?
It is a collection of factors used by financial and strategic purchasers to evaluate an acquisition target. Typically, experienced purchasers consider two criteria pertaining to a business-
- the specifications made publicly available to mediators like investment bankers so that they can identify what the buyer is looking for and find deals that suit
- The conditions created for internal assessment allow a buyer to choose whether or not to pursue a purchase further swiftly.
The region, size of the investment or firm targeted, and industry are the most typical publicly declared investment parameters. Some investors may publish investment-type requirements, such as management buyouts (MBOs), distressed opportunities, or succession issues. Buyers utilize these criteria to analyze purchase possibilities swiftly.
Key criteria for business financing
The criteria provide insight into the objectives for an investment firm to evaluate its decision. Some of the reflective objectives are as below.
- A balanced distribution of wealth and income.
- Financial stability and fast funding.
- Minimize risks in investment.
- Appropriate use of available resources.
- Efforts to rectify the payment balance.
The primary goal of the criterion is to gather as many facts as possible. Internal investment criteria will be used to determine if an expression of interest (EOI) or letter of intent (LOI) should be submitted after gathering information on the opportunity. The following are some of the primary criteria that firms consider before proceeding with a funding meeting.
Management
Investors seek motivated individuals and teams willing and able to collaborate with them throughout the investment’s life cycle. Teams should be long-term dedicated to the company and appropriately compensated for commercial success.
Market and Competition
Investing in markets that are expanding, large, and addressable is always profitable. However, Financing firms recognize that challenging niches may have genuine value – firms don’t have to be trying to address a “global” problem to get the desired attention. In any case, management should have a solid strategy for gaining market share. It’s critical to spell out the nature of the competition, market dynamics, and the company’s main differentiators.
Customers
Products and services should have a defined market that can be identified and addressed and clear proof that they are meeting unmet consumer requests or requirements.
Product or Service
products and services that provide incremental improvements or aspects of disruption to the status quo are preferable investments. Companies should present a clear roadmap describing how the technology will be put out commercially to develop existing technologies further or develop new ones.
Fundraising Requirements
Startups seek most investments with the expectation of a 12- to 18-month financial runway from the current funding round. To become self-funding or reach some liquidity event, a firm shouldn’t generally require large, numerous further rounds of investment.
Cash flows
Businesses will generally generate a yearly income of more than £100,000. Well-thought-out revenue strategies with realistic growth projections are what an immaculate investment proposal presents. It is usual for early-stage firms to miss sales projections; therefore, management must stay ambitious.
Valuation
As a Fund, investment organizations expect a commercial return on their investment, necessitating that starting values and valuation growth forecasts represent this fairly.
Expense Plan
Companies should clearly state how the funds generated will be used to fund critical hire onboarding, extending sales and marketing resources, and contributing to product, service, or general business growth.
Liquidity
Financial firms have a commercial mandate and seek a target investment return. Business plans should include a list of significant commercial or financial milestones that must be met for the firm to gain substantial value from potential purchasers or lenders.
Conclusion
Although not exhaustive, the above investment criteria summarize significant aspects that each investment firm looks forward to and that a company must include in its proposition. If this is done appropriately, the firm will have a far better chance of keeping the customer’s initial interest.