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The 10 essentials of the financing memorandum

Applying for funding remains a meticulous process

To organisea good financing mix for your business, you will need to apply for financing. Without a thorough and well-substantiated financing memorandum, an application for financing these days has no chance of success. So here are the ten most important things you should definitely include.

#1 Management summary

The banker or investor wants to know who he is dealing with. A good introduction is half the battle. Briefly but powerfully describe who you are, what you do, what the current situation of the company is and why you need financing. You can elaborate on these points later. Also take into account the intended reader. A bank will read such a memorandum differently from a private equity investor. The difference lies in the emphasis. The bank will primarily want to know what the risks are and how they can be reduced ('mitigated', in banking jargon). A private equity investor places greater emphasis on the growth potential and a possible strategic exit.

#2 Company history and current structure

The history of the company. Who founded it? How did the company develop? What were the milestones? Again, keep it short. You are not Geert Mak. In addition, an explanation of the legal structure and ownership relationships within the company. Preferably do this in the form of an organization chart. It's better to make it clear.

#3 Key figures

Who are the key figures in the company and what is their role? A well composed management team creates trust. Explain for example why the members of the MT complement each other well. If necessary, attach the CVs of the most important managers. Certainly in the case of SMEs, continuity is a point of concern. A financier wants to be sure that the succession of a DMS who is getting older is well organised. If you are looking for 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 do the responsibilities lie, how is reporting done and what systems are used for this. Also tell something about the human capital. Are employees highly or poorly educated, what is the staff turnover and absenteeism, and is it easy or difficult to find suitable people? If external forces are important for the company, tell something about that too.

#5 Housing

Are the premises owned or rented? In the case of ownership: what is the value, has there been substantial renovation, how does the property appear on the balance sheet (private property or company property). In the case of rented property: what is the rental period? Depending on your situation, the accommodation is a risk or an extra security. In either case, a financier will want to know. Owned property also offers the possibility of asset-based financing.

#6 Business model

How is money earned? How is value created, how is sales organized and what is the sales market like? The more certainty the better. Stable, recurring revenue is of course the best. It is 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 cash (accounts payable - production stock - accounts receivable - cash).

#7 Market and competition

In order to explain the market and competitive situation, Michael Porter's Five Forces Model is still often used. This model focuses on five "forces" that influence the market: the power of suppliers; the power of customers; the extent to which substitute products or services are available; the threat of new entrants; and the internal competition of players in the market. Porter's model dates from a time when markets were much more static than they are today. Rapid digitisation is blurring the boundaries between sectors. Many entrepreneurs prefer Alex Osterwalder's more dynamic Business Model Canvas. Whichever model you use, go into the most important developments in the market or markets in which you are active and explain why you are better than your competitors.

#8 Actual figures

Financiers nowadays want a well-founded financial analysis of the credit application. This primarily involves the profit and loss account, the balance sheet, the cash flow and the analysis of the working capital. This last part is of crucial importance. 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 that are related to financing, such as 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 an acquisition or rapid growth, but it is also advisable to add this in other cases.

#9 Projections

A sales forecast must be convincing. Do not present unrealistic revenue increases, especially if they are a sharp departure from previous years. What helps is to calculate the projected sales in multiple ways and at different levels. If a company is active in several markets, provide a forecast for each market. Make it particularly clear how the requested financing will affect the development of the turnover.

#10 Explanation of request for credit

Actually, the rest of the memorandum is foreplay. Here's what matters: why do you need money? If the structure of the memorandum is right, the request for credit will not come out of the blue. The banker or investor now understands the market in which you operate, what the force field is and in which phase the company is. The growth plan or takeover is therefore only logical. Of course it is also about the figures. Don't just explain the background to the credit request, but also present it in a numerical overview. Don't forget to mention the personal contribution.

To conclude

You cannot convince a financier with a memorandum alone, but also with a good presentation. Pay a little attention to the design and also make a PowerPoint of the memorandum.Let yourself be well advised and supported in the preparation, but tell the story yourself.

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Marieke Klaassen
Marieke Klaassen van BeurdenPartner