We're often told that SMEs are struggling due to a lack of funding, but that's patently untrue. If anything, entrepreneurs have never been more spoilt for choice in the wake of angel investor networks, crowdfunding platforms, fintech innovation, and the growing volume of specialist lenders.
The real issue is not a lack of funding, but a lack of funding feasibility.
Most SME funding applications look something like this: we need money to buy resources so that we can make more money. In other words, they depend on future cash flows. And that's always challenging because the future is inherently uncertain (now more so than ever).
So how can you validate whether financing future cash flows is feasible or not?
#1 Does it make business sense?
Borrowing money to make more money is rarely as simple as it sounds. Non-linear growth, unforeseen costs, and cash flow delays tend to be the rule rather than the exception. It's impossible to predict these accurately, but you can forecast how things will look if everything goes perfectly (which it won't) and then work out how much variance your business can tolerate.
#2 Does it make investment sense?
Entrepreneurs are predisposed to take risks because they directly benefit from growth. However, non-equity investors don't get to share in that upside. The best they can hope for is getting their capital back along with some interest, so they're principally concerned with repayment confidence. An investment can make business sense, but may still be too risky from an investor's perspective.
#3 Does it make entrepreneurial sense?
Business growth does not guarantee ownership wealth. However, even if your business does make more money for you personally, will it make enough to compensate you for your risk?
An owner-run SME is a very risky investment, and many entrepreneurs underestimate their required rate of return. It's not unusual for a funding proposal to make business and investment sense, but fall short of entrepreneur feasibility.