Preparing to Raise Capital
One of the most challenging aspects of running a small business, whether you own a start-up or a mature business in expansion mode, is raising capital. Many businesses fail due to insufficient capital to cover operating expenses and invest in growth. Without operating and expansion capital, business owners have limited options at a time when more options to add products and services is the key to business success.
Start Early to Find Capital Resources
The key to finding sources for capital is to plan well ahead of anticipated needs and to develop an effective business plan that describes in detail how your business will make the money to repay lenders or investors.
Clear, understandable, transparent communication is key when seeking cash to grow a business. The ability to describe company goals, needs, and the potential for success is critical. Prospective investors want to know about your products and services, your employees' expertise, your current financial position, your marketing plans everything required to effectively evaluate whether lending or investing capital makes good business sense - to the investor.
So Where Do You Start?
- Look for potential lenders or investors who understand your business. Join professional or industry organizations. While you may not find direct sources of cash within these groups, you're likely to discover networking opportunities and sound advice from others about financing sources. Sometimes the best advice comes from those who've "been there and done that."
- Don't wait until you're desperate. The worst time to find a lender or investor is when you're desperate for business capital. Investors and lenders aren't concerned with your company needs. Your immediate need for capital isn't a factor when evaluating the merits of a potential investment or business loan. Raising capital shouldn't be a last-minute exercise.
- Think long term. How much cash will you need for the first year? Two years? Five years? Plan ahead to determine all your capital needs for the coming years. Don't rely on multiple loans or investment cycles to cover daily operations or unforeseen events and downturns.
Determine how much working capital you need long term to develop a business case justifying that amount. In short, secure more up front. It's better than asking for less over the years.
- Float on the rising tide. Is your market sector or industry doing well? Lenders and investors are more confident about your potential success if your area of commerce is currently thriving.
Be prepared to engage capital resources when your market segment is expanding. This makes your case for expansion stronger.
- Diversify capital sources. If you seek funding from friends or family, assume the worst and plan to approach other investors, too. Consider Small Business Administration (SBA) loans. Discuss your cash needs with the commercial loan officer at your bank - a place where your business is highly regarded. Prepare multiple scenarios, from worst to best case.
This demonstrates fiscal responsibility and your understanding of your business, competitors and the marketplace in which you operate.
- Be transparent and honest. Disclose both positive and negative consequences to investing in your business. A great relationship with a lender or investor is based on forthright communication. Whether your business is struggling or thriving, potential lenders and investors scrutinize every aspect of your operations. Your company is under the fiscal microscope.
Further, it's essential to keep lenders and investors current on actual or potential financial problems. Often, your capital "partners" help overcome problems. Surprises make lenders and investors rightfully nervous, so be straight.
- See the opportunity from the other side. It's easy to understand your own business needs, but what about the needs of lenders or investors? What do they want? What do they need to know? What will make them comfortable investing in your business? If you're not sure ask!
- Prepare for a variety of outcomes. Don't assume you'll raise the cash you require. Develop scenarios and plans for a variety of outcomes:
- higher or lower interest rates;
- higher or lower levels of investment;
- longer or shorter terms for payback;
- unanticipated needs and pitfalls.
Create contingency plans to respond quickly to counter-proposals. Not only will you be able to act faster, but you'll increase lender or investor confidence because you've clearly done your homework and thought through a variety of reasonable outcomes.
Here's the key: When you seek capital funding, it is important to remember you're the "face" of the business. You represent the enterprise. Be prepared, plan ahead and always be ready to show lenders and investors why investing in your business is good business for them.
While your need for funds is critical to you, investors and lenders want to know the benefits to them. Weigh risk versus reward the way potential investors do. No savvy investor, no traditional lender, will take a flyer on your business and hope for the best. It just isn't going to happen.
Put prospective investors and lenders first. Weigh their needs for security and a clear plan for payback.
Then, deliver on that plan. This creates a good credit history and insures future investors and lenders will be more inclined to risk capital on you and your business in the years to come.
Having access to business capital, regardless of the source, is the cushion you need to weather a choppy economy and grow your business in good times and bad.
And that's the key to long-term business success.