Raising Significant Capital: What To Do When You Need Big Bucks
Bootstrapping and running lean are the best ways to grow a company to profitability quickly, but when you do decide to expand, or to significantly grow company revenues and expand margins, then finding outside capital may be necessary. Without external funding you may be forced to step away from new acquisitions, new product lines, more staff or the potential to expand into new markets.
Borrowing expansion capital from banks and other traditional sources is always a possibility, but if traditional borrowing isn't an option, or if you want to bring in additional guidance and experience, then finding outside investors might be the better choice for long-term business success.
So where and how do you start your search for a large infusion of expansion cash? You have options. Lots of them.
Your Company's Fiscal Needs: First Things First
Before you start your search for working capital, determine how much cash you need and what you can handle from monthly revenues, whether you're looking for a loan or looking for outside investors. Expect more outgo each month so plan for it.
Nothing more severely undermines your business' credibility than the lack of a solid business plan detailing how much capital you need and why. Develop a loan proposal that answers all questions an investor might ask to simplify and speed up the process of acquiring the cash your business needs.
The last thing you want is to give away too large an equity stake for capital you don't really need. Or, to have to go back to raise more capital because you under-estimated capital needs. This makes you look unprepared and it identifies you as an unreliable credit or investment risk. Remember, you're after capital from outside sources and these lenders or investors want assurances that their money will be paid back - with interest. It’s important to look good to attract good sources of business capital.
Pull out the calculator and start crunching the numbers to develop a cogent loan proposal describing how much you need, what you'll give in return for the cash, and how that infusion of cash is to be used. Lenders and investors want all the details, and a solid, written loan proposal instills confidence by demonstrating your business acumen.
Does Your Current Business Structure Make Sense?
It should if you want to secure significant financing to expand.
If you intend to bring in multiple investors, you'll need to set up a formal corporate structure. A C-Corporation offers shares of stock that can be freely traded among an unlimited number of owners, which makes C-Corps great vehicles for small companies that "go public."
Setting up a C-Corp is a great choice for small businesses that intend to reinvest profits in the business and to continue to attract outside investors in the years ahead.
An S-Corporation is another possibility, but with an S-Corp, ownership is limited to 100 shareholders and those shareholders all must own the same class (type) of stock. An S-Corp is often the best option for short-term growth, especially if you don't need dozens of small investors and can rely on a few larger investors.
State laws and regulations on equity and ownership stakes vary, so check with your accountant or other financial professional for specific guidance in designing the best corporate structure for your company - a corporate structure that best suits your capital needs today, tomorrow and well into the future.
Determine the Type of Investor Your Company Needs
Any individual, any institution or any business with cash to invest is a potential investor in your business. But if you need significant capital, small, individual investors may not have sufficient funds to meet your business objectives.
Here's the break-out of pros and cons for potential sources of significant investment capital.
- Family and friends. You may be lucky to have a rich uncle looking for an investment opportunity. In this case, Uncle Steve could be the perfect source of funding. Just make sure to keep business and family relationships distinct and separate.
Create detailed legal agreements, make sure you and your friends or family understand the terms of the agreement, and keep in mind that if your business suffers a setback, your friendship or family relationship may suffer, as well. Not good, and a definite negative to using friends and family as sources of business capital.
- Employee ownership. An Employee Stock Ownership Plan (ESOP) is a great way to raise capital because it gives your employees a "stake" in the success of their business.
An ESOP delivers other benefits. It keeps key employees in place and increases staff productivity because employees work for their own benefit, not just for the benefit of company owners. In fact, employees are company owners under the terms of an ESOP, and that builds employee loyalty and encourages innovation on the part of your staff.
- Customers. Some of your regular customers may be happy to provide capital in return for developing new products or services that benefit these new investor-partners. For one thing, you already have a good business relationship with these potential lenders who've experienced the quality of your service or product offerings. A BIG plus.
Some customers may invest in your company to receive new technology, expertise or preferential terms in return for the use of customer capital, lowering interest rates and monthly outflows.
With these business agreements, protect any product rights, patents or intellectual properties, and make sure the agreement doesn't hamper long-term growth potential, or limit you from doing business with other, competing customers. In other words, don't close yourself out of new markets tomorrow in exchange for capital today.
- Investors. Individual investors, often called angels, are people or organizations that invest funds in small companies in return for an ownership stake or a return on investment. Investors typically seek high returns and a quick payoff, though some angels will make longer term investments if they see regular, reliable returns over the course of time - payments made monthly or quarterly.
- Venture Capitalists (VC). Venture Capitalists are firms that pool investor funds and invest that capital in small businesses, start-ups and even larger, expanding companies.
Like angels, VC expect a very good return, but some venture capital firms take a longer-term view of their investments, especially in technology fields or in emerging markets.
Venture capitalists typically want a say in how the company is run in exchange for the capital they provide so ask yourself if you're willing to add an "outsider" to the company board of directors. If not, look for capital elsewhere.
As you evaluate potential sources of significant capital funding, keep in mind that every investor has its own agenda and objectives and these objectives that may not dovetail with your objectives.
Savvy investors view opportunities without emotion. They crunch the numbers, weigh risk versus reward and base investment decisions on your business' history of growth and the potential for additional growth. They ask questions and evaluate your financial position in a way that may make you uncomfortable. After all, it is your business - your baby.
So, do your homework and prepare thoroughly for requests for more information, pointed questions and the potential for lengthy negotiations. Stay objective and keep your goals and the needs of your business in mind to hook up with the right source for a significant amount of cash.
That's the best way to ensure you bring in outside investors and raise the capital you need on your terms.