Every startup or SME owner thinks they’ve got a great idea. The spark that inspired them to take a risk, leave employment and start building a business.
But then, sooner or later, they’ve got to get that idea funded.
A lot of founders are surprised by the questions lenders ask as part of applying for business finance. They ask about the market, sales figures, the people behind the business. That big brilliant idea barely gets a mention.
Of course ideas matter. But they’re not what makes a business fundable.
Lenders are assessing risk, they’re not judging an innovation competition. A lender’s principal job is working out whether a business has a realistic chance of succeeding. They’re interested in whether or not a borrower (that’s you) can repay a loan.
When a lender first reads your proposal, they have to assume the possibility of losing 100% of their investment. One page which convinces them of Return On Investment is worth 50 pages of nice-to-know fine details.
Understanding the lender’s mindset helps you present your big idea in the most appealing light. That’s the difference between a successful loan application and the disappointment of rejection.
To funders, good execution beats a great idea
Many entrepreneurs get hung up on originality as the key to success. It isn’t. In fact, too much originality might potentially be seen as a negative by lenders. An unproven idea represents a risky investment.
Your customers, on the other hand, are more likely to embrace something new if it genuinely solves an existing problem. That’s an angle which might impress investors; talk about the number of people who are waiting for what you’re selling. Flip your pitch depending on who you’re speaking to.
A critical mistake made by many (I’d almost dare to say most) startup entrepreneurs is having one pitch for everyone. Funders and customers care about very different things. Customers want to see how your product makes their lives better. Funders care about how quickly they’re getting their money back. Develop and refine one pitch for each audience.
So yes, a new idea can be valuable. But history is packed with successful businesses who simply delivered an existing product or service better.
Hamburgers have been around since the 1750s, while the earliest restaurant discovered by archaeologists dates back to about 2,700 BC. McDonald’s came along over 4,600 years later and focused on standardisation, speed, and consistency at scale. They’re now arguably the most recognised brand on Earth. The ancient eateries of Sumerian Lagash could never.
Ok, that’s an extreme example. But it serves to highlight the lender’s mentality: An idea is only worth what a business owner can do with it. That’s why lenders spend so much time understanding the individual behind a loan application.
The people driving the business still matter most
When assessing a funding application, lenders want to know who they’re backing.
That doesn’t mean you need decades of experience or a flawless CV. First-time entrepreneurs successfully secure finance every year. What matters is demonstrating the qualities that suggest you’re prepared for the challenges ahead.
Lenders look for evidence of:
- Commitment to the business
- Relevant skills or industry knowledge
- Problem-solving ability
- Realistic decision-making
- Resilience and adaptability
Starting a business is rarely a smooth journey. Markets change, costs rise, unexpected challenges emerge. A lender wants confidence that you can navigate those obstacles and keep your business moving forward.
Lenders are investing as much in entrepreneurs as they are in businesses. Once you get your head around this fact, it gets easier to present your idea in the right context.
A clear market opportunity is essential
Your business doesn’t need to be unique to succeed. It just needs customers. It’s a big mistake to assume that just because you’d buy your product, others will too. Lenders want to see hard evidence of genuine demand for what you’re selling.
That could include:
- Market research
- Customer surveys
- Competitor analysis
- Industry trends
- Early sales or expressions of interest
- Anything else that demonstrates who will buy your product and why
A business with a clear target audience and a well-defined opportunity often beats a highly innovative concept with no proven demand. Capturing attention is one thing, but proving you’ve got a viable market captures funding.
The plan matters more than the pitch
Entrepreneurs are often told to perfect their pitch. But don’t mistake that for preparing some inspirational ‘eureka’ style presentation based on your personal backstory.
Your pitch itself (the one you tailored just for investors, remember?) should leave the audience wanting more. Information overload will just make them switch off. Instead, touch on the headline points and make it clear that the fine details are in the business plan for them to review.
The pitch should boil your most interesting elements down to five minutes that capture a lender’s curiosity. It’s your hook, not your hook, line, rod, and reel all rolled into one.
A compelling story can certainly help flesh out a business concept. But lenders prefer to see a practical business plan that shows you’ve thought carefully about operations and growth.
Your business plan should explain:
- How your business will generate revenue
- Who your competitors are
- How you’ll reach your customers
- What costs are involved
- How future growth will be achieved
- What risks are involved
That last one is vital, don’t shy away from acknowledging risk. Some entrepreneurs feel they need to present an entirely positive picture. Lenders know better; every business faces challenges.
Demonstrating awareness of potential risks and explaining how they’ll be managed often builds more confidence than pretending they don’t exist. Realism often beats raw naked ambition when it’s time to secure funding. Speaking of which…
Repayment is always on the agenda
Your immediate goal is to secure funding. The lender’s immediate goal is to find confidence that their investment will be repaid.
This causes a potential disconnect where borrowers see funding as the final outcome of a process. But for lenders that’s just the beginning.
Funders will closely examine your business’s financial forecasts. They’re looking for evidence you can generate sufficient income to cover operating costs while also comfortably meeting loan repayments.
Nobody can predict the future, but you need to show that your assumptions are realistic and supported by evidence. Overly optimistic forecasts can set alarm bells ringing quicker than conservative ones.
Don’t be afraid to show short-term losses in your early months. Be honest about seasonal peaks and troughs. One thing I often recommend is working out the bare minimum number of sales you need to break even in your first year. Use that to produce three forecasts:
- Worst case scenario: You break even
- Good profit: Add 10-20% to the sales needed to break even, this would represent a good first year of trade
- Best case scenario: Add 50% to the sales needed to break even, this represents a perfect first year
This way, you’re showing a mix of ambition and realism. Lenders understand that uncertainty exists. They want to see that you understand it too.
So… what makes a business fundable?
When founders imagine a successful funding application, they often picture a lender being wowed by a groundbreaking concept. Just like in the films. The reality is usually less dramatic.
Fundable businesses tend to share some common characteristics:
- They solve a genuine customer problem
- They operate in a market with clear demand
- They have realistic financial projections
- They are led by committed founders
- They have a clear plan for growth and repayment
Notice that none of these characteristics depend on having a completely original idea. They depend on you identifying a clear opportunity and developing a credible plan to make the most of it.
Turning your big idea into a real funding opportunity
Every business begins with an idea. But if you’re seeking finance, you need to recognise that lenders are looking beyond the concept itself. They’re weighing up potential for survival, growth and (of course) repaying what you borrow.
The strongest funding applications show the clearest evidence that a business is sustainable and profitable. Using your big idea as a starting point, you should demonstrate how it led you to:
- Gain a deep understanding of your market
- Realise you’re the right person to turn the idea into a successful business
- Formulate a realistic plan for making it happen
Lenders aren’t judging your idea. They’re judging you, the person who had that idea. If they see a founder performing the alchemy necessary to transform a concept into commercial reality, that’s what makes a business fundable.
Guest Blogger Lee Vickers is Regional Director at Business Enterprise Fund North East. This not-for-profit social enterprise provides alternative finance to the region’s startups and SMEs. Last year, we invested over £7 million, helping create or protect 556 jobs.
If you’re looking for support with business funding, complete the TEDCO Initial Enquiry Form and we’ll be in touch.