The 7 Factors To All The Capital You NeedDec 07, 2020
Capital is the life blood of a business. Without it – bills pile up, nothing moves, and key people search out greener pastures.
As an entrepreneur it’s your job to keep money in the bank. Running “lean and mean” and building a business can take you far but there will come a time when (hopefully) you need to fund exponential growth.
Accessing capital is a skill, and it surprises me how few entrepreneurs understand this and do it well.
We see this first hand as we meet with a wide variety of business owners. Some seek funding far too early and others pay little attention to ongoing capital requirements until (sometimes) it is far too late. At times, an entrepreneur comes to the table with a fantastic package for a funding group to review.
When a business owner comes fully prepared, seeking capital can find an audience quite quickly.
These packages come in a wide variety of shapes and sizes but they typically include these 6 major components.
Several years ago our team was working on securing several million dollars to fund a condominium development in downtown Calgary. The project (at the time) was set to add some much needed new housing in an emerging neighborhood.
The goal was to convert a low density parking lot into a 30 floor development. Once completed and occupied the condominium project would bring in millions of dollars in property taxes and accentuate the downtown skyline. The development also brought with it 100’s of high paying jobs, a wide variety of contracts for other businesses and a promise to gentrify the neighborhood.
The developer, construction group, architectural firm, and all the other key partners were top notch. We focused on the variety of projects the team had already completed. We gave examples of past challenges, how they were overcome OR what lessons were learnt. Remember - the bigger the “ask”, the stronger the team and the supporting information needs to be.
How do you prove that your interests are in line with your funding group?
What kind security exists in the opportunity?
How committed (both in time & money) is the management team to the business?
If things don’t go according to plan how does your backer recoup their capital?
Potential funding groups want to understand where your priorities are and reduce risk where ever possible. They are after all investing in you.
Each “unknown” increases the perception of more risk which reduces the amount of interest in your business and increases the cost of funding.
How far can you take it?
What does the future look like?
It’s up to you to paint a picture in your backers mind. Funding groups want to see you succeed so that they can be there for you as your needs grow. Help them help you.
Be methodical in your approach and be prepared to demonstrate it. The more sophisticated funding groups understand that projections rarely reflect reality but expect to see them regardless.
A proforma forces the entrepreneur to think through the growth potential and substantiate his/her claims. A proforma also allows funding groups to understand where the entrepreneur places emphasis within the business as well as help identify potential “financial” landmines.
“Smart money” funding groups take this opportunity to provide guidance on how to tighten the plan (in addition to funding) when they recognize an entrepreneur they want to back.
5. CAPITAL REQUIREMENTS
Depending on the type of business you operate you may have a one-time requirement for funding OR an ongoing need. Circling back to your projections backers want to know that you have a firm grasp of your numbers and appreciate your capital requirements.
Do you need a lot of funding all at once or should you manage with smaller tranches of capital along the way?
Regardless of the type of funding requirements there will be milestones in your business along the way. What are they?
Milestones act as goals for your business and help you build the momentum you need. Whether your buying a business or expanding an existing operation, you typically need to act fast to take full advantage of the opportunity.
7. COMMUNICATE THE CONSTRAINTS
These could include limited time to purchase the business without competition and/or the limited amount of capital required for the transaction. Constraints create scarcity, reduce “maybes” from backers and encourages those with real interest to show up. The most important rule here is to use real constraints.
If you cry wolf to try to force a decision your backers will inevitably find out and damage your relationship and reputation.
Creating and maintaining revenue is an entrepreneurs #1 job. Learning how to effectively access capital makes it easier to do your job well.
REMEMBER: BIG THINKING ATTRACTS THE BEST MINDS AND DEEPEST POCKETS.
To Your Success,
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