All businesses need money; How much and what kind is the question. Businesses can add a tremendous amount of money to the bottom-line and investors can get higher returns by financing businesses properly at each stage of their maturation.
Whether you are a start-up, in growth mode, in a mature market, or a market in decline your business has financing needs. You only have two choices, debt, or equity. So, when debt and when equity? And what kind of debt and/or equity? The answer is different for every business.
Debt, equity, or a combination can be used to finance businesses at each stage of the business lifecycle, but many factors will dictate whether you use debt, equity, or a combination to finance your business:
- How big is your market opportunity?
- How much do you need to invest in product R&D, marketing, and sales to keep up with competitors or market changes?
- What geographies are you going to do business in?
- What are different debt financing sources besides banks?
- What kind of terms can you get?
- Where can you find equity investors? Angel, seed, private equity, or venture capital?
Unsecured debt can be the cheapest and least risky form of financing no matter the stage of your company. However, this form of financing can be exceedingly difficult to get. Equity financing is most common for Start-ups but there are ways to help Start-ups to secure debt financing. Immature industries that are in the innovation and early adaptor stages require much more capital to be spent on sales and marketing to capture market share than more mature industries. These are just a few examples of what you need to think about before you finalize your financing strategy and seek financing options.
What can happen if you get the wrong financing advice?
In 1998 I started my first company, AnyCollege.com. AnyCollege was a niche search engine that helped high school students who planned on attending college narrow down their choices. For example, if you wanted to find a college with a four-year accounting program, located in the south, with a division 1 men’s ice hockey team, your search result would return The University of Alabama, Huntsville. At that point the student could apply, do an online virtual tour, or ask an expert a question. AnyCollge.com made money from the colleges by providing them with qualified prospects.
In the mid to late 90s it was boom for the internet and online technologies; it seemed dot coms were being created by the second. Money was everywhere and every investor wanted a piece of the dot com era.
When I started AnyCollege.com I had no programming experience, and I was operating a company for the first time. I thought I knew how much money I needed but I had no idea where to get it. Naturally, I looked at advisors I trusted, my tax accountant, business lawyer, and family members. I had family member who was a CFO with a law degree. I sought advice from this individual and gave him some shares for helping. He reviewed my business plan and gave me his feedback. He told me debt financing from friends and relatives would be the quickest and easiest form of financing. His plan was that I would raise $35,000 by getting 7 of my relatives to each put in $5,000 and give them 5% each of the company, 35% of the company for $35,000. He was right, it was a quick raise, it only took a week to raise the money. But it was not the best advice.
I was just out of college, who was I to question a CPA with a law degree and years of business experience. However, he had limited knowledge of financing options for start-up or early-stage companies. The result is I gave up way too much equity for $35,000. Years later when we sold the company this one decision cost me millions of dollars.
In summary, businesses need to do a lot of research and planning to figure out the best ways and methods to finance their business now and in the future. Doing it wrong can cost entrepreneurs, owners, and investors a lot of money in the short and long term. Let us help.
Contact
For questions on this First Principles Brief, or if it’s the right time to sell your business, please contact:
Brent.Teiken@teikengramer.com
Phone: 701-306-5525
We’ve been through it. We’ll help you prepare for it.