Equity capital is always much more expensive than borrowed capital, yet many entrepreneurs are convinced their business would surge ahead if only they could find more equity investors.
This viewpoint doesn't arise from being naive about the fundamentals of corporate finance. Rather, it is simply based on hope.
The first hope is that a new investor will supply the requested funds and then remain silent. But private equity money is scarce today and "mute money" is non-existent.
The second hope is that additional equity will forestall the need to drive operating earnings. The company's inability to generate positive cash flow, however, is what often creates the wish for an equity injection. Adding more investors means more people asking why expenses are exceeding revenue.
Therefore, the focus on revenue and expenses doesn't diminish. It soars.
You've probably already noticed a direct correlation between how long you've known your investors and how patient they've been during your company's ramp-up phase. Before trying to meet new backers, consider pursuing the following alternative tactics.
Select supportive suppliers
When funds are tight it's natural to base buying decisions primarily on price. But your business will benefit more from establishing strong vendor relationships than from finding the absolute lowest bidders.
Think about each significant recipient of your company's checks. Evaluate them individually on how enthusiastic they are about your venture. Ask your payees whether they already hold ownership positions in any of their other clients' companies.
Then be creative in asking them to accept delayed and nonstandard forms of compensation. Paying in-kind and later is often wiser than paying less. Furthermore, your customers will be assured to know your suppliers regard you as a relationship buyer vs. a transaction buyer.
Target marquis customers
The benefits of attracting a few impressive clients as early as possible cannot be overstated. Your business plan explains your unique selling proposition. Signing up highly regarded customers provides a resounding validation of your concept's efficacy.
Even more impressive is having great nameplates grant you preferential treatment by accelerating their payments. Large but slow-paying accounts can be painful and even fatal. Also, remittance accommodations from strategic-partner buyers will comfort your investors and vendors.
Regardless of the visibility of their name or historic reputation, try to ascertain your targeted accounts' current financial health. Determine the financial community's view of their creditworthiness. If you can't negotiate speedy collection of a large account, you'll already know whether you can borrow against it or monetize it via factoring.
Ask your depository bank
Your bank is making a profit on your checking accounts, so ask for a copy of its small business loan application. Reviewing it months before you plan to request a loan will enable you to improve your approval chances.
For instance, if a personal financial summary must accompany your personal tax returns, now is the time to get organized. A snapshot of your finances printed from a computer budgeting program conveys your monetary discipline better than a typed balance sheet.
The loan application may require two or more years of your company's tax returns. If your firm hasn't yet celebrated its first anniversary, inquire now about whether your bank ever waives such a stipulation.
Leverage the turndown
Many wait to ask their bank for a loan until they're certain they'll receive a "yes." Don't make that mistake.
Your goal is not to avoid having your first loan request be denied.
It is to obtain bank capital the instant you can qualify, because it's a bargain compared to equity capital.
No rejections are enjoyable, but there's much to gain when your bank declines your initial loan request.
You and your banker can have a very valuable discussion. Learn about your bank's current lending appetite plus how it views your industry. Understand thoroughly the specific achievements your company must display before your bank will deem it creditworthy.
Then incorporate these goals into your business plan. Focus on how you'll accomplish them with the help of your strategic partners. They and your current investors benefit when you become a bankable credit.
ACTION STEP: Immediately after establishing strategic relationships with key customers and suppliers, get a loan application from your bank. Understand the borrower profile your bank seeks. And remember Wayne Gretsky's advice: "You always miss 100 per-cent of the shots you don't take."
