3 Reasons to Consider getting a Feasibility Study

There are many reasons to get a Feasibility Study, but 3 main reasons that you should consider. If you can answer yes to any of these questions, then getting a feasibility study is probably the best way to go.

1. Does your lender require a feasibility study?
2. Is your project over $500,000?
3. Are you trying to raise capital from private equity or angel investors?

Does your lender require a feasibility study?

A feasibility study is almost always required when you are seeking an SBA 7(a) or SBA 504 loan. Now, I say almost always because some smaller loans may not require it, but loans over $500,000 are more likely than not to require a feasibility study. Your SBA Loan Officer will be able to give you more information if you need one. But having one in hand ready to go can absolutely help in the application process.

Some lenders will require or strongly encourage a feasibility study regardless of the loan type if the loan you are requesting is over $1 million. The main purpose is to have a greater sense of confidence that your project can actually repay the loan or have sufficient hard assets to collateralize the loan.

Is your project over $500,000?

This is somewhat of an arbitrary figure, but typically feasibility studies typically cost 1% of project costs, making $500,000 the price point where feasibility studies should seriously be considered in the Go/No-Go decision-making process. This allows you to verify the validity of your project’s earning potential to not only become self-sustaining but also to meet your internal rate of return (IRR) requirements.

A secondary question you can ask yourself is, can you afford to lose or gamble $500,000? Most people and companies cannot afford to blindly risk that kind of money and require some visibility into the project’s likelihood of success. For most project managers, the cost of a feasibility study is simply the cost of doing business. If you are funded by private equity, are a non-profit, not-for-profit, or municipal/governmental agency handling public funds, your charter or by-laws may also require a feasibility study to be conducted. Commissioning a feasibility study shows good financial stewardship, especially for those handling public funds.

Are you trying to raise capital from private equity or angel investors?

If you are in the capital raising process with private equity or angel investors, then you likely already know that you need a business plan for your business, but you might not have realized that you also need a feasibility study. A business plan explains how (i.e. the strategies and tactics) you will build the business and make a profit, but a feasibility study will show that your business model can actually work. Feasibility studies are very often used as the basis of your business plan, making its development easier and more compelling to potential investors.

With private equity, they look at the numbers first and foremost, then check those against their internal IRR and benchmarking targets. A financial economic feasibility study contains all the most commonly used financial key performance indicators (KPI). Your pitch needs to be solid, but so do the underlying numbers.

Angel investors are often investors in early-stage companies with promising concepts, sometimes even at the pre-prototype concept stage. This is a high-reward and high-risk area of investment. Angel investors are people who know what it takes to build a business from the ground up, centered around solving a problem. They are also people who deal with a lot of young and new entrepreneurs. You can set yourself and your idea apart from the rest by having taken the time to invest in a feasibility study. It helps to prove that you are confident in your idea, that you already have skin in the game, and that you are a serious entrepreneur ready to do the work needed to be successful.

Alyn Robert is here to help

Alyn Robert Economic Strategies specializes in financial economic feasibility studies and other business economics services. Reach out today with your questions and get started now. Working with Alyn Robert, you can expect that we will operate in a clear, direct, and transparent style. We maintain a high-level ethical standard for research and consultation, and Alyn Robert is a fully independent firm, so you can trust that we are able to offer the most objective perspectives and opinions on the problems that you face.