What Investors and Lenders Actually Look At First

Companies approaching investors or lenders usually begin by explaining what makes their business exceptional: the market opportunity, the product, the management team and the growth potential.

All of this matters. But it is rarely where a professional capital provider begins.

Before becoming interested in the upside, investors and lenders want to understand the quality of the business, the reliability of the information presented and the risks attached to the capital being requested.

Management naturally starts with potential. Capital providers tend to start with evidence.

How does the business actually make money?

This is one of the simplest questions in corporate finance, but also one of the most revealing.

A company may have substantial revenues and an impressive customer base, yet still struggle to explain clearly where its economic value is generated.

What drives revenue? How recurring is it? What determines margins? How much capital is required to support growth? How concentrated is the business around a few customers, suppliers or individuals?

Consider two companies generating €40 million of annual revenue.

One has recurring contracts, diversified customers and a 20% EBITDA margin. The other depends on two customers for most of its turnover, operates at much lower margins and absorbs significant working capital as it grows.

The headline revenue is the same. The quality of that revenue is very different.

Professional capital providers therefore look beyond size. They want to understand the economics behind the numbers.

Historical performance gives credibility to the forecast

Every financing process involves forecasts, but forecasts are more credible when they can be connected to historical performance.

If a company has consistently produced €3 million of EBITDA and now forecasts €8 million within two years, the increase may be entirely reasonable. But there needs to be an identifiable explanation.

Perhaps a new factory is becoming operational. Perhaps new customer contracts have already been signed. Perhaps an acquisition will add scale or margins.

What matters is the bridge between the historical business and the projected one.

A business plan that assumes higher revenue and profitability each year without identifying the operational drivers behind those assumptions will be treated cautiously.

Investment committees and credit committees do not underwrite optimism. They underwrite assumptions that can be tested.

Cash matters more than the headline EBITDA

EBITDA is useful, but it is not cash.

A company can report attractive profitability while consuming substantial liquidity through capital expenditure, working capital, taxes or debt service.

For a lender, the distinction is fundamental: interest and principal are paid with cash.

For an equity investor, cash conversion also reveals something important about the quality of the business. A company that requires increasing amounts of capital simply to maintain growth may be less attractive than its income statement initially suggests.

If a business generates €6 million of EBITDA but requires €4 million of annual capex and another €1.5 million of working capital, the picture changes considerably.

This is why a financing case should never be built around a single attractive metric.

The market will eventually reconstruct the full picture. It is better to present it properly from the beginning.

Existing leverage changes the analysis

A company seeking €10 million of new debt cannot be assessed only on the basis of that €10 million.

The lender will examine everything already sitting on the balance sheet: bank facilities, leasing, factoring, shareholder loans, guarantees and other obligations.

Maturity dates matter as much as nominal amounts. €15 million of debt can be manageable if it is supported by strong cash generation and well-distributed maturities. The same amount can become problematic if most of it must be repaid within twelve months.

Equity investors also care about leverage because debt sits ahead of shareholders and can reduce strategic flexibility.

The relevant question is therefore not simply how much debt exists, but how the entire capital structure interacts with the company's cash generation.

Concentration risk can change the investment case

Customer concentration is another area investors and lenders examine quickly.

A €50 million business may look highly attractive until it becomes clear that one customer represents €20 million of annual revenue.

The same applies to dependence on one supplier, one licence, one distribution channel or one individual who controls most of the commercial relationships.

These concentrations are not necessarily fatal. A major customer may have worked with the company for twenty years under a strong contractual relationship.

But the dependency needs to be understood.

A useful advisory question is:

what could disappear tomorrow and materially change the business?

Whatever the answer is will probably become a major focus of due diligence.

Management credibility is tested through consistency

Capital providers invest not only in numbers but also in the people expected to deliver them.

Management credibility is not demonstrated by an impressive biography. It is demonstrated through command of the business.

A good management team knows its numbers, understands why actual performance differs from budget and can discuss risks without becoming defensive.

If the CEO presents one set of assumptions, the CFO another and the financial model a third, confidence falls quickly.

Interestingly, acknowledging a problem can sometimes strengthen the investment case. Investors and lenders are accustomed to businesses having weaknesses. What concerns them is management that does not understand or cannot quantify those weaknesses.

Governance indicates how institutional the company really is

Governance also matters because external capital changes the relationship between the company and its stakeholders.

Are financial statements reliable and produced on time? Are shareholder relationships clear? Are related-party transactions documented? Are major decisions properly authorised? Can the company produce its corporate and financial documentation efficiently?

For founder-led businesses, institutional capital can require a degree of transition.

Informality may have worked perfectly when ownership and management were concentrated in the same hands. Once external capital enters the company, the same informality can appear as risk.

This does not mean introducing unnecessary bureaucracy. It means ensuring that the organisation can withstand external scrutiny.

Different capital providers look for different things

A lender is primarily concerned with repayment and downside protection. It will focus heavily on cash flow, leverage, security, covenants and resilience under adverse scenarios.

An equity investor accepts greater risk but expects greater upside. It will therefore place more weight on growth, scalability, management, competitive positioning, valuation and exit potential.

The same company can therefore be attractive to one type of capital provider and unsuitable for another.

The adviser's role is not simply to present the company positively. It is to understand what matters to the specific investor or lender being approached.

Evidence before ambition

A capital provider may initially look at revenue, EBITDA and leverage, but the decision ultimately depends on the coherence of the entire proposition.

Does the business model make sense? Are the forecasts connected to reality? Does the company convert earnings into cash? Is leverage sustainable? Are key dependencies understood? Does management appear credible?

A good financing presentation should not pretend that the company has no weaknesses. It should demonstrate that management understands them. That is what sophisticated investors and lenders are ultimately looking for: not perfection, but evidence that the risks are visible, understood and compatible with the return being offered.