How to build a successful fundraising strategy for SMEs

Fund Raising is seen as a challenge by many SMEs. The methodical approach can assist to maximise the benefits.

Fundraising (loan or equity) has been a challenge for SMEs- be it at start up stage, growth, expansion or maturity. Fundraising is described as a painful exercise by many SMEs mainly due to their lack of awareness about the appropriate approach and hence vulnerable to exploitation by unscrupulous elements.

Fundraising can be pain-free and can do wonder for SMEs if it is approached methodically.  We attempt to explain below the important steps to make fundraising a pleasant one:

Step 1 – Have a clear business plan:

Create a Business Plan and ensure that your plan is all-encompassing- Marketing, Production, Purchasing, Personnel, and Financial aspects. Ensure that the financial plan projects sales, costing, profit, and underlying assumptions realistically.

Step 2– Create a case for funding

At the heart of all good fundraising is a powerful and engaging argument as to why a lender/investor should support you. It may sound easy but in practice, many firms (new or old), may fall at this step. You need to explain the opportunity, strategy, USPs, resources and commitments.

Step 3 – Identify and designate the person for fundraising

You might choose to pursue on your own. Nowadays it is common to retain a financial consultant as prolonged engagement on their own considered by many SMEs as a distraction from operations. However, check his credentials and clear the terms beforehand. Don’t place blind faith and remain part of the process.

Step 4 – Analyse and plan the right source to approach

Decide about which Sources of funds you will focus on. Each source has distinct characteristics and meets specific needs & circumstances. Some of the options are:

  • Banks: A common source of funding for SMEs
  • NBFCs: Leasing, factoring, mortgages, etc
  • Online Sources: Crowdfunding, Factoring,
  • Vendor Financing:  Banks partnering with  Mother units/OEMs
  • Individuals – Personal Loans from friends and private lenders
  • Venture debt: Mezzanine funding  
  • Private Equity/Venture Capital: Equity/Quasi-equity
  • Govt Support: – Subsidies, Incentives, tax breaks, etc

Normally SMEs look at the bank to finance. It is not alone. There are avenues for raising funds to meet the specific needs outside Banks. 10 Questions to Answer Before Applying for a Bank Loan

Step 5 – Ask for money

Seek to fund from identified sources. All need careful preparation but the more tailored, the greater the chance of success.

Step 6 – Build Credentials for the long term

Adhere to commitments made to lenders/investors and keep disclosures at the desired level. Consequently, the credit rating will go up and rate of interest & other terms will be better. Future fundraising endeavours will be easier.