What You Need to Know When Raising Capital
Getting your finances in order is a key step to raising capital
As a new or growing business or startup, you may find yourself needing more capital to ramp up or maintain production so you can create a profitable business.
To get it, you’ll need to pitch to investors. This requires knowing what they are looking for and how to make your offer appealing and investment-worthy.
Bottom line: If the capital won't be used to create enough value to be worth their while, they'll want to invest elsewhere.
Know Your Business Before Raising Capital
Before you even sniff at taking someone else's money, you must know you have a viable idea. You should understand the industry inside and out. How do you fit into the bigger picture?
Do you have a strong market? Is this something your audience wants, and do you know who they are? Is there a gap in the market you can fill? Is the audience big enough to allow you to grow and expand?
Speaking of which, how quickly will you need to scale to become profitable? What will it take to be sustainable and not need more capital? Do you have operational, technological, managerial, and strong financial systems in place to make the best use of capital?
Are you clear on how much capital you'll actually need to become self-sufficient? If you need to raise more capital too often from too many investors, it can feel crowded quickly.
What do you plan to use the funding for? Do you have clear financial goals and a roadmap to achieve them?
You need to know your business and have a plan before securing the funds. All of these are essential questions to ask yourself. That way, you're prepared to pitch and confidently answer investor questions.
Know Your Numbers Before Raising Capital
How much do you need? How much do you have?
If you have achieved financial success with a previous business or this one, leverage financial success when building a pitch (if that’s how you plan to raise capital).
You should be able to explain your business through your numbers. So what numbers do you need to have ready?
Some of your most important ones are your growth metrics, which may vary slightly depending on the phase you're in:
Lifetime value
Revenue growth
Break-even point
Gross margin
Budget variance
Cash flow
Know Which Source Will Work Best for Your Business Before Raising Capital
There are four primary sources of capital. Each fits different needs and different business styles.
Debt Capital
This is capital you borrow. You must repay it plus accrued interest. E.g., credit cards, bank loans, government-backed loans (SBA, etc.).
Cons: Interest can become an anchor holding you in place. Additionally, we should note, if the business fails, you still owe the money. Depending on your credit and collateral, terms may also be cost-prohibitive.
Pros: You're not giving away shares of your company. You have reliable monthly payments and set terms. Loans are relatively easy to get and manage.
Equity Capital
Money is obtained from people who own shares of your business. E.g., preferred stock, and common stock.
Cons: It dilutes your ownership. You must answer to shareholders. You could lose your company if one entity acquires majority shares.
Pros: Another person is invested in your success. They can be an asset if they have industry connections and resources. It doesn't have to be repaid, except usually through ROI. It’s best for those focused on growth and quick scaling.
Crowdfunding
With this source, you acquire small amounts of funding from large amounts of people.
Cons: You must get a lot of people interested in your idea. Crowdfunding can come with a stigma because if done poorly, it feels desperate.
Pros: It lets you test the market and not give up equity. The fact that people buy in shows you have a market. If your idea fails or you can't deliver, no one person is out a lot of money. It's ideal for someone who has strong social media skills and has an idea people will get excited about.
Capital Grants
These are given to achieve a certain goal. You don't have to repay them, but you must comply with the conditions for the grant.
Cons: A limited number of people will get the grant. You may have to prove you're using the funds correctly.
Pros: Application is easy and requirements basic, usually with no upfront costs. If you have a specific need for which grants are offered, this can be a good option.
Turn to an Experienced Accountant Before Raising Capital
For most businesses, raising capital is critical to success. You must be able to buy inventory, hire, and scale to achieve profitability. But it's important to raise the right capital for your situation.
It's also important that you raise it correctly. Failing to do so can become a weight dragging your business down instead of the boost it's supposed to be.
Outrageous interest rates, stifling balloon payments, impatient shareholders, bad press --- doing it wrong can cause a ton of problems.
An accountant who is experienced in raising capital can help you get it right. Don't let a bad funding decision drag your company down. Contact us today.