What Business Owners Get Wrong When Looking for Capital

A great article was recently published By Ami Kassar in the New

York Times regarding looking for capital.

The life of a small-business owner or entrepreneur can be chaotic. We live from priority to priority, crisis to crisis. There are only 24 hours in a day and only so many hours to sleep. Believe it or not, I still haven’t changed the phone system in our office that I posted about months ago. I have given up on it for now, moved on to higher priorities. As owners, we concentrate on pleasing our customers and whatever urgent issues arise during the day, and we let other issues — even important ones, sometimes — take a back seat.

That’s why I’m sympathetic to business owners who are too caught up in the day-to-day crush to do a good job of looking for capital. Whether small-business owners are looking for debt or equity, and regardless of how far along they are in their business, the process can be exhausting. And while phone systems are fairly easily to replace, a mistake with a debt or equity round can be devastating,

The best advice that I think I can give anyone in the hunt for money is to get organized early, do your research, identify your targets for financing, and pursue them in a focused and methodical way. As small-business owners and entrepreneurs, we often try throwing as much as we can against the wall to see what sticks. But when it comes to looking for money, this approach can consume time and is unlikely to end happily. Still, I see it all of the time.

Imagine a biotechnology company that spends six months trying to pitch pretty much every Internet investor in the country. Or the owner of a start-up who networks only with lenders who require companies to be profitable and to have been in business for at least two years? Imagine a loan application submitted with financial statements that have fundamental mistakes in them or are months behind. Or consider a business plan to raise investment money that was too poorly written to be understood. I know it sounds silly, but again, I see these kinds of mistakes all of the time.

One of the biggest mistakes that we see is that owners try to raise too much money. They think about how much money they need for the next several years — instead of what they need to make real progress this year. At this point, we often advise owners to go take a cold shower and call us in the morning. If you’re looking for a loan, you need sufficient collateral and cash flow to cover the debt.

The market for capital is inefficient, and in many cases results in gridlock for entrepreneurs, lenders, and investors. The smartest thing owners can do is to make sure they understand how the process works. You should figure out how much money you need and what the best loan or equity solution will be for you. Find an adviser or mentor you trust, one who has been around the block before. Understand what documents your lender or investor will demand, and make sure you have them together before you begin your search. Check your personal and business credit scores, and make sure they are in order.

Remember that when you’re speaking to a potential investor or lender, you’re entering a two-way partnership. They are investing or lending in order to make money. Just as they are interviewing you, you should do the same. How many investments have they made in the last year? If it’s a loan officer you’re talking to, how many loans have they made? What is their personal approval rate in the organization? Who will be making the final decision, and how much influence will they have?

I can’t speak for the investment community, but I can assure you that in the lending community there are thousands of loan officers sitting in bank branches across the country, wanting to keep busy so they can protect their jobs. The more applications that they have open at once, the busier they seem. Don’t put yourself, and your dreams, at their mercy. A properly structured loan or investment in your company can make all the difference to you and your future.

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