FRAM SYSTEMS ^blog

What do we, as people need to survive? Air, food and water are absolutely essential and without any of them we will certainly die, some faster and some slower.

Why do businesses die? We’ve seen lots of businesses come and go and being ‘BIG’ as in ‘AIG’ does not ensure that your company will be long lived. After all where are Studebaker, MCI, Enron and more recently giants Lehman Brothers? All big players that lost it all.

One reason businesses die is the lack of an essential element: money. Without it nothing moves. Even if your sales are great and you can’t afford to pay for your inventory you may bust. If things are seasonal or slow you may have to shed parts of your business just to stay afloat. Often we look first to cutting in the wrong places: employee layoffs. After all, aren’t employees every company’s largest recurring expense? Think about this; what does it cost to acquire and train a new employee? How much revenue does each employee generate for your business? If their job is important and they are experts it may be the most foolish cut you can make.

So what can you do to save money or raise capital when times are tough? Let’s look at some possibilities. Firstly, the time to look for funding is before. It’s always better to deal from strength than from weakness. If you ask for money, even if you don’t need it, and are able to build maintain and grow a good record of repayment you are ahead of the game. Obtaining and regularly using credit is just like exercising your body – when you need it, and you always will – it will be there for you.

I gotta give you credit.

Getting credit is also like exercising in that it takes some time to see the results of your efforts. Obtaining capital can take any from a couple of months to a year or depending on they source. If you have valuable collateral like secured accounts receivable or real estate you may get the funding you need rather quickly, for venture capital 6, 9, 12 or 16 months of tricky negotiations may be required. You have to have a head start before you need money so pay attention to you sales and cash flow projections, especially if you have a new product launch or other expansion in mind.

Make sure you keep your banker informed of your plans and your anticipated needs. If you foresee your needs being greater than your banker is accustomed to or comfortable with, start working with to arrange for interim financing until you make a deal you both can live with. Have some concrete figures to show your banker and potential funding sources and investors like increased market share, patents, increased sales or improved margins. Any positive news you can produce will ease your investor’s wariness and make your chances of continued and increased funding more likely.

Fish bite more on baited hooks

Although banks are looking for their ROI as interest, other investors, like VCs are looking for anywhere from 5 – 20% or more equity stake in your business. Be very careful of who you do a deal with. You will have to live with that group as having a say in how you do business and once you take their money, it will be very hard and expensive to get rid of them. They may even be looking for how to get rid of you!

You may start with 100% of a growing business, but the more times you drink from the equity investor well, the less of your golden company you will own and the less of say in how that business is run will be yours. If your business is your baby, your love, your pride and joy don’t put yourself in a position where you own less than 51% of it. At the least, keep investors hold on your board minimal. Give them some say but don’t let them bully you. Think before hand what your contractual rights are before you sign any. As in chess, planning ahead a few moves is the key to keeping control of the board.

Always build company valuation. Keep it high on the balance sheet and in your mind. When selling your company to bankers and investors, remind yourself that they are only human like you and their perceptions of you and your company hold more sway than you imagine. Even the best deals on paper, the ones that look like no brainers, run by a proven management team, will fall flat if they are not well presented.

Don’t go it alone.

Raising capital is not simple or easy. As they adage goes, if it were, everyone would do it. You may be an expert in your business but are you comfortable dealing with the people you’ll need to ask for money from? Do you have the time to take away from your core business to make your credit search the priority you need it to be? If not, a business finance consultant is a wise choice. They will be conversant in the language of finance and know what banks and investors are looking for and that is down the individual decision maker. If they have brought profitable deals to these key players before, they’ll have an entrée that you may never have. Investor and bankers will really have the same focus or perspective and the right consultant will know how to approach both. A good consultant will take the time and effort to organize and prepare you company before you go knocking on the vault door.

No matter what your industry, education or experience level, there is little reason to go it alone. Spend time talking to consultants before you take off in the wrong direction. Find one that you are comfortable with and that understands you, your business, your goals and needs.