2015-09-11 13:52:50 Raising Capital English Learn about how to be prepared when you need money or funding for your business, whether loans or equity, such as knowing your options and... https://d2yxjugd6jl4bj.cloudfront.net/wp-content/uploads/2015/09/08233024/2015_9_9-small-am-5_common_mistakes_companies_make_when_seeking_financing.jpg 5 Common Mistakes Companies Make When Seeking Financing

5 Common Mistakes Companies Make When Seeking Financing

5 min read

Whether you’re starting a new business or expanding an existing $50 million enterprise, you may need to raise outside financing. I was surprised when my accountant, Gary Topche of Topche & Company, told me the mistakes business owners make are similar no matter the size of their businesses.

His company specializes in serving the financial needs of businesses ranging from startups wanting to grow big in a hurry to companies already worth half a billion dollars. Naturally, I wanted to know more about these mistakes, and share insights from someone so close to ground zero.

Here are five common mistakes that Topche sees companies of all sizes make.

1. Not Being Prepared

“The biggest mistake small- and mid-sized companies make is not being prepared,” says Topche. Start with your vision for the company. How big do you want to be, and how fast do you want to grow to get there? Create a budget. This is critical!

You need to decide if you must raise capital (and how much), what you’ll use it for and during what period you’ll spend it. Determine your funding needs by estimating the related costs for this particular phase of your business or for starting up. Estimate the revenue as well. Do a monthly cash flow analysis for the first year, then project on an annual basis to years two and three. When do you break even? This analysis will highlight the period for which you need outside financing.

2. Not Knowing Your Financing Options

The good news: “There [is] an array of new financing options that are available,” says Topche. The bad news is that the abundance of options can be overwhelming to the business owner. Learn the basics of equity and debt financing so you can evaluate the options your professionals advise.

Equity investments can come from friends and family, angel investors via online or crowdfunding platforms, venture capitalists, private equity firms or the public in the form of a mini IPO—Title IV of the JOBS Act, Regulation A+— or conventional IPO.

Equity is less risky than a loan because there is nothing to pay back. If your business fails, however, then you will have to deal with angry investors, which can be especially uncomfortable if your investors are friends and family. Since you don’t have to funnel profits into loan repayment, you’ll have more cash on hand for expanding the business.

One potential downside is that despite the lack of a requirement to immediately pay your investors back, someone else will own a percentage of your company. In the long run, that decision may prove more costly than the dollar amounts involved in paying back a loan. Since the investors own a share of the company, you may need to consult them on how you run your business. And finding the right investors can be time consuming.

On the other hand, a bank or lending institution doesn’t have ownership in your business, and has no say in the way you run your company. Interest on the loan is tax-deductible. A loan can be short-term or long-term. Whatever the loan’s terms, however, you must pay the money back within a set time frame.

Loans come in many shapes and sizes, including SBA-faciliated financing, traditional bank loans, microloans, peer-to peer loans (i.e. those offered through Lending Club, Prosper and Funding Circle), lines of credit, term loans, factoring, merchant cash advances and asset-based loans or equipment leasing. E-marketplaces like Biz2Credit, Fundera and Lendio make it easy for you to find the right option for your company by completing a single application.

It makes sense to find out if you can qualify for a bank loan first. Find one that offers the lowest interest rate but also requires the highest level of qualification.

A savvy accountant or financial advisor can steer you to the option most appropriate to your circumstances, which saves you from needing to know the nuanced differences of each option.

3. Not Having the Right Tools

There are several important categories of tools: financial, business and marketing.

  • Financial Tools: I’ve already mentioned putting together a budget. Your budget is the foundation on which you build your financials: profit and loss, cash flow and balance sheet statements. To this I’ll add the financial assumptions on which you based your revenue projections. Established companies don’t necessarily need to clarify their financial assumptions, since they base projections on the past history of the company. But financial projections are incredibly important for startups. Investors want to know the business metrics that drive the success of your business. “Investors [also] want to know the company’s burn rate,” said Topche. The burn rate is the rate at which a startup exhausts its financing before generating positive cash flow from operations.
  • Business Tools: Startups will need an executive summary. This is the one- to three-page document that you share with potential investors to entice interest. You’ll use an investor slide deck when presenting to and following up with investors. Some angels I know have de-emphasized wanting to see a business plan that describes the investment, though others will want one. Impress everyone by having it on hand.
  • Marketing Tools: The most important of these is your “elevator pitch.” Polish it. You never know when you’re going to meet someone who can connect you to money. The point of an elevator pitch is to get your prospects interested enough in your company so that they give you their card or refer you to someone else who might be able to help. You don’t need to reel them in with the elevator pitch; you just need to get them on the hook.

4. Not Knowing Why You Need the Money

Understand why you need the money. Do you need to hire people, increase marketing spending, improve technology, move into a larger space or build a factory, produce inventory, purchase equipment or obtain working capital? The reason you need the money will affect what type of financing is right for your company.

“You need to match the use of the money to the right funding option or options,” according to Topche. For example, let’s say you run a gym and you need to buy equipment. This equipment will generate revenue for five to 10 years. There are companies that specialize in financing gym equipment, says Topche. Financing gym equipment is less risky than financing equipment for which there is a strong resale market. You may not know this, but a good accountant does.

5. Not Getting the Right Professional Guidance

Not all accountants are created equal. Some are low-cost and are great for bookkeeping. Others are authorities on taxation and GAAP (Generally Accepted Accounting Practices). When it comes to financing issues, you need someone who is a strategic thinker and a problem solver. Your accountant person may not be an expert on all the latest new financing options, but he or she should know how to find out about them, and evaluate which options are right for you.

Financing can be complicated, but with the right preparation and advice, you’ll get the money you need.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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