How to raise money

Most business owners understand their product but lack expertise in raising money through debt or equity. Obtaining proper capitalization is critical to growth and the long-term success of your company.
There are basically two ways of increasing your availability to funds—equity and debt. The advantage of raising money through equity is that you don’t have to pay it back. It is infusion of funds—most likely large amounts of funds—that immediately provides cash for your use. The obvious downside is that you give up some portion of your ownership. The first place to look for quick equity is to friends, family (and fools). The owner is the best salesman and representative of the company and they often develop a “deck” to assist them in this venture. A deck is merely a power point slide show that the owner can use in presentations that they are making. For this purpose they are often very good but don’t be fooled—these “investors” are not buying into your company because of your dog and pony show—they are actually “buying” you. They know you, they believe that you can be successful and are willing to invest because of that belief. It certainly helps if you can have other collateral materials to support your cause but chances are you are the reason for their investment. To move to capital markets to raise real money you need the use of a professional investment banking firm that can take your compelling story to another level and attract professional investment rather than emotional investment.
Debt is the second way to raise cash. There is good debt and there is bad debt. Good debt is matching long term needs with long term payments and vice versa. Good debt is a mortgage on your house—bad debt is mortgaging your house to pay off your credit cards. Debt can be raised from either commercial banks or a secondary market. If possible banks are by far the best option. Banks have the best interest rates and create advantageous long term relationships. Unfortunately banks are regulated by the federal reserve and if you do not meet their required ratios or are in an undesireable industry you simply will not be their customer. They may never say no. Instead they may just constantly ask for more information until you give up. Regardless, you are not going to get your money. Secondary markets are in many ways the wild, wild west. Many brokers lack the expertise to get your deal done. The litmus test should be in the information that they require and in how they use those materials in compiling the package that they use to present your compelling story to market. Lacking a professional package you will not receive serious consideration from credible lenders. As a minimum the package needs to include significant financial information; third-party validation of the business plan; market and competitor analysis; demonstrable evidence of management team and operational competency; financial projections; corporate regulatory compliance; and analysis of off-balance sheet assets. Thien this must be packaged in a professional format acceptable to the professional readers. Often times good deals are not financed simply because they didn’t make the investment do the work that is needed to properly present them to market so be wary of brokers who do not speak this language.

Good Debt; Bad Debt

I often hear the goal of a business owner as “I want to pay off my debt.”  When questioned more closely the source of this goal is the frustration and perceived risk of having debt and the debt payments.  The idea that the owner would make more money if he didn’t have the debt is a little illusory—the debt also helped build the businesses.  What is good debt?  There are two criteria in answering this question—the type of debt and the use of he debt.  Is owning a home a good thing?  Of course and few of us would own homes if we had to save the money and pay cash, but would it be a good thing to put the purchase of your home on a credit card?  Long-term assets need to be purchased with long-term debt. The converse is also true—don’t pay off your credit card with a home mortgage.  Short-term assets need to be purchased with short-term debt. So the first criteria is to match the type of debt to the type of purchase.  The second (and probably more important criteria) is the use of the debt funds.  A good use of debt in a business is to finance growth (inventory, cash flow, etc.) and to purchase assets that produce income in excess of their cost. Obviously we don’t want to use debt to purchase non-income producing assets (like toys) for a business.  Be careful about using debt as a tax plan.  Businesses that run their business with the objective of minimizing taxes are missing the point—the business needs to be run for a profit.  Of course all debt—even good debt—brings with it risk.  One reason the owner gets the big bucks is to make the decisions that balance the use of the debt with the risk.

Don’t Confuse A Lack of Cash With A Need For Financing

Over the years hundreds of companies have approached us with requests for financing. The vast majority of these companies had already been turned down by their bank. The lack of cash is a symptom—the disease is the reason why they are out of cash. Putting more money into those companies (treating the symptom) would only delay the inevitable—unless you first treat the disease. What is amazing is how few of those same companies really understood their disease much less had a plan to treat it. The three most common causes of a cash shortage are uncontrolled growth, lack of cost controls tied to falling sales, and a lack of profit. Additional financing does not address any of the real, underlying problems.

In start-up situations inadequate capitalization is very common. If people waited until they really had adequate capital to start their business there would be few businesses. More commonly they started with a credit card and a few borrowed dollars. In order to avoid giving up any of their equity, what they are really doing is trying to substitute equity with debt. Suffice to say that this is an unlikely course of events and the only proper way to develop your company is to establish equity—make a profit and keep it in the company. After all of the personal sacrifices that the owner has made to get the business going it takes a mature individual to again delay personal gratification for the sake of making the business more secure but then it takes a mature individual to make a business successful.

For businesses beyond the start up stage you must face the fact that your bank has turned you down and you need to face the facts that caused this rejection. Look first to the fundamentals—your income statement and your balance sheet. Where are the warts and how are you going to eliminate them? Look to your credit rating. Our counselors will tell you that personally (and at our level there is no difference between personal and business) your credit score is more important than your income. What is your score, what does it need to be, and what is your plan to obtain it? Are all of these (and others) adequately addressed in both your business plan and in your bank package? Is your business plan designed to really win the game, is it the focus of your daily operations, and is under constant review? Is your bank package a complete, professional, due diligence package that presents your company (the good and the bad) in the best possible light?

Often times a company doesn’t have effective “sales tools” to use in obtaining financing. Calling on the bank is making a sales call. If you called on a client as poorly as you called on your bank your conversation would go something like this, “this explains our product and as you can see it doesn’t work very well. I want you to buy it and pay top dollar anyway.” As absurd as this sounds one of the most common reasons why companies cannot get adequate financing is the quality of their “sales tools.” The last thing a bank needs on their balance sheet today is a new “toxic asset.” Before you even ask for a loan make sure that you are not the “toxic asset” that your numbers seem to describe.

The first leg of the stool is to understand your problems and make sure that you really have a plan to solve them; the second leg is your bank package and presentation; the final leg is who you are approaching. You have already tried your conventional route and failed—you need to expand your search to a secondary market and you need to work with a specialist to do so. Unless you are a business owner who doubles as a financial specialist, you need to work with someone who is.

There can be no guarantees when it comes to obtaining financing. Every company and every case is unique. All you can do is increase your chances by doing things right.