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If you’re starting a business or thinking about starting one, chances are you have thought about how much money you need to get started. You may also realize that you don’t have sufficient capital on your own to get started. So, what do you do?
Fortunately, there are many ways to obtain outside funding to help you get started. Funding options usually involve one of two concepts. One is a loan (i.e., debt), in which the lender makes its money by you paying the loan back with interest over a term or a specific period of time. The other is an investment (i.e., equity), in which the investor is given an agreed-upon percentage of ownership (i.e., number of shares) in the business in exchange for providing the capital. In this instance, the investor is hoping that the business will grow substantially over time so that their shares in the business will appreciate in value, thereby earning a Return on Investment (ROI).
When you write your business plan, you want to keep in mind who your audience is. A loan and an investment are two substantially different things, and the ways that lenders versus investors make money are different enough to require different business plans. To help you plan accordingly to pursue the funding you need, here are the main differences between a bank business plan and an investor business plan.
Return on investment (ROI)
If you are seeking investor funding, prospective investor(s) will want to see an ROI scenario that shows the current valuation and estimated future valuation of the business. A business determines its current valuation via the investment amount requested and the percentage of ownership given in return for the investment (e.g., a $200,000 investment for 20 percent ownership, through simple math, means 100 percent ownership is worth a valuation of $1,000,000). It is important to note that when seeking an investment, especially for a start-up, the valuation is largely based on perception, and potential investors may or may not agree with your perceived valuation.
While there are certified business valuators you can hire to determine a precise business valuation for you, you can also approximate your business valuation without hiring one. The latter is commonly done