Capital Raising for SMEs: What Investors Look for in Financial Models

Introduction

Raising capital—whether equity from investors or debt from a lender—requires more than a compelling pitch deck. At the heart of any funding decision is the financial model: the detailed projections that demonstrate how the business will generate returns and service its obligations.

The problem is that many SME founders build models that look professional but fail the scrutiny of experienced investors and credit analysts. This article covers what those reviewers are actually looking for, and how to build a model that withstands due diligence.

What Equity Investors Look For

Realistic Revenue Assumptions

The most heavily scrutinised part of any model. Investors compare your growth trajectory against industry benchmarks, historical performance, and their portfolio experience.

A SaaS business projecting 200% year-on-year growth in year three needs to justify that assumption with evidence: current pipeline, market size, and comparable company trajectories. Unsupportable hockey-stick curves are the fastest way to lose credibility.

Clear Unit Economics

Investors want to see that each unit of sale is profitable. Key metrics include:

• Customer Acquisition Cost (CAC)
• Lifetime Value (LTV)
• Gross margin per unit
• Contribution margin after variable costs

The relationship between these numbers tells the story of whether the business model works at scale.

Explicit Assumptions

A good model doesn't hide its assumptions in complex formulas. Every assumption should be clearly stated, documented, and ideally linked to a source or evidence. Common assumptions that need documentation:

• Revenue growth rates by product line
• Gross margin trends and justification
• Staffing ramp and cost per hire
• Marketing spend as percentage of revenue
• Churn or retention rates

Sensitivity Analysis

Investors want to know what happens when things go wrong. A model that only shows the base case—and only in aggregated numbers—raises immediate red flags.

Best practice is to show three scenarios (base, upside, downside) and identify the 3-5 variables that most significantly impact valuation. This demonstrates commercial awareness.

What Debt Providers Look For

Debt providers have a different focus. They're less concerned with equity value and more concerned with the ability to service and repay debt.

Debt Service Coverage

The primary metric is Debt Service Coverage Ratio (DSCR):

DSCR = Operating Cash Flow / Total Debt Service (Principal + Interest)

Most Australian lenders want a DSCR above 1.25x for standard loans. Lower than that, and they'll either decline or require additional security.

Cash Flow Visibility

Lenders value predictability. A business with contracted recurring revenue is viewed more favourably than one with project-based, variable income. Key questions lenders ask:

• How visible is the revenue pipeline?
• What percentage of revenue is contracted vs at-risk?
• Are customer contracts long-term or month-to-month?

Working Capital Assessment

Lenders examine the cash conversion cycle closely. A business that takes 60 days to collect receivables but must pay suppliers in 30 days has a structural working capital gap that increases risk.

Covenant Headroom

If the loan includes financial covenants (which most commercial loans do), the model should show comfortable headroom above all covenant thresholds—not just in the base case, but in the downside scenario too.

Common Model Flaws That Kill Deals

Circular References Not Resolved

Models with deliberate circular references that aren't properly resolved (e.g., using iterative calculation without controls) signal a lack of technical rigour.

Hardcoded Numbers

Numbers typed directly into formula cells with no source reference. A reviewer can't verify or challenge a hardcoded number, making the model untrustworthy.

Missing Balance Sheet

Many pitch models skip the balance sheet and only show P&L and cash flow. This is a red flag for any sophisticated investor—the balance sheet is essential for assessing financial health.

Over-Optimistic Timing

Revenue arriving earlier than is realistic, expenses pushed out, or working capital improvements that assume best-case outcomes. Conservative timing assumptions build credibility.

When to Engage a Professional

Building an investor-grade model is a specialised skill. For capital raises above $500K, engaging a professional modeller or CA to review your model before presenting to investors is a smart investment. The cost is small relative to the amount of capital at stake and the credibility it provides.

At BizVal, we build and review financial models for SMEs preparing for capital raises, ensuring they meet the standards expected by sophisticated investors and lenders. Contact us to discuss your capital raising requirements.

For a practical guide to building the Excel models investors expect to see, visit ExcelWiz.com.au.

Frequently Asked Questions

Do I need a full three-way model for a capital raise?

For equity raises above $500K and any debt financing, yes. Investors and lenders expect integrated P&L, balance sheet, and cash flow statements. For smaller seed rounds, a detailed P&L with cash flow projections may suffice.

How detailed should my model be?

Detailed enough to demonstrate you understand the key drivers of your business, but not so detailed that it becomes unmanageable. 3-5 year projections with monthly granularity for the first year is standard.

Can I use my accounting software's forecast feature?

Most accounting software forecasts are too simplistic for capital raising purposes. They rarely include proper scenario analysis, sensitivity testing, or balance sheet integration. A purpose-built model in Excel is the standard.

How do investors verify my assumptions?

They'll cross-reference your market size claims against industry reports, compare your growth rates to comparable companies, sanity-check your margins against industry benchmarks, and pressure-test your key assumptions in conversation during due diligence.