Without a thorough and well-substantiated financing memorandum, a financing application nowadays is a priori hopeless.
Therefore, here are the 10 most important things that should not be missing from a financing memorandum.
#1 Management summary
The banker or investor wants to know who he has in front of him. A good introduction is half the battle. Briefly but powerfully describe who you are, what you do, the current situation of the business and why you need financing.
You can elaborate on these points later. Also keep in mind the intended reader. A bank reads such a memorandum differently from a private equity investor. The difference is in the emphases. The bank will primarily want to know what the risks are and how they can be reduced ("mitigated," in banking parlance). An investor is more likely to emphasize growth potential and a strategic exit.
#2 Company history and current structure
The history of the business. Who founded it? How did the company develop? What were the milestones? Again, keep it short. You are no Geert Mak. In addition, an explanation of the legal structure and ownership within the business. Preferably do this in the form of an organization chart. It is much clearer.
#3 Key figures
Who are the key people in the business and what is their role? A well put together management team creates trust. For example, explain why the members of the MT complement each other well. If necessary, attach the resumes of key managers.
Especially in the case of SME businesses, continuity is a concern. With an aging DGA, a financier wants to be sure that the succession is well organized. If you are seeking financing for an acquisition transaction, such as a management buy-in, explain convincingly why the acquisition candidate is the right person.
#4 Organization
Explain how the company is managed. Where are the responsibilities, how is reporting done and which systems are used for this purpose. Also tell something about the human capital. Are employees highly or poorly educated, what is staff turnover and absenteeism, and is it easy or difficult to find suitable people? If external forces are important to the business, tell something about that too.
#5 Housing
Are the business premises owned or leased? In the case of ownership: what is the value, has there been substantial renovation, how does the property appear on the balance sheet (privately owned or company owned). In the case of rental: what is the lease term? Depending on your situation, housing is either a risk or an additional security. In either case, a lender will want to know. Owning real estate also offers the possibility of asset-based financing.
#6 Business model
How is money made? How is value created, how is sales organized and what does the sales market look like? The more certainties the better. Stable, recurring revenue is of course the best. It's not for nothing that subscription models are spreading so fast.
In addition, you will also have to provide clarity about the so-called asset conversion cycle. In other words: how quickly do you turn money back into money (creditors-production-stock-debtors-cash).
#7 Market and competition
To explain the market and competitive situation, Michael Porter's Five Forces Model is still often used. This focuses on five "forces" that affect the market:
- The power of suppliers;
- The power of buyers;
- The extent to which substitute products or services are available;
- The threat of new entrants;
- The internal competition of players in the market.
Porter's model dates from a time when markets were much more static than today.
Due to rapid digitalization, the demarcation between industries is blurring. Many entrepreneurs prefer Alex Osterwalder's more dynamic Business Model Canvas. Whatever model you use, address key developments in the market or markets in which you operate and explain why you are better than your competitors.
#8 Current figures
Financiers nowadays want a thorough financial analysis of the credit application. This primarily involves the income statement, balance sheet, cash flow and working capital analysis. That last component is critical. Where necessary, provide a clear explanation of the figures. It can also help to show the development of your business in a number of ratios, for example, liquidity, solvency, profitability and productivity.
There are also specific bank ratios related to financing, for example the Debt Service Capacity Ratio (DSCR), which indicates whether the corporation can meet its interest and repayment obligations. A liquidity forecast is mandatory in the case of a business acquisition or rapid growth, but it is also advisable to add it in other cases.
#9 Forecasts
A sales forecast must be convincing. Don't mirror unrealistic sales increases, especially if they show a sharp break with previous years. What helps is to calculate the target revenue in multiple ways and at different levels. If a business operates in multiple markets, provide a forecast for each market. In particular, make it clear how the requested funding will affect revenue trends.
#10 Explanation of credit request
In fact, the rest of the memorandum is foreplay. Here's what matters: why do you need money? If the construction of the memorandum is sound, the credit request will not come out of the blue. By now the banker or investor understands what market you are operating in, what the force field is and what stage the business is in. The growth plan or acquisition is therefore only logical.
Of course, it's also about the numbers. Don't just explain the background of the credit request, but also present it in a numerical overview. Don't forget to mention what the own contribution is.
Tip: You convince a financier not only with a memorandum, but also with a good presentation. Pay attention to the design and also make a PowerPoint of the memorandum. Present with conviction. Get good advice and support in the preparation, but tell the story yourself.
