It’s true - raising capital to launch your business may be one of the toughest battles you will face. But let’s not forget the uphill climb that still remains - the threat of debt.
While it is unlikely you will be able to avoid it (and always remember that like cholesterol there is good debt and bad debt), you can certainly manage it.
You may have raised your initial capital, gotten things off the ground and are comfortable with your cautious coast toward success. But along the way you will often find that you need even more capital. So what do you do? Borrow.
There are two basic options when attempting to raise capital; debt or equity. Both create forms of cash in hand, shaking the money tree and loosening the dollars that will keep you going. But at what cost? Consider the pros and cons:
DEBT
Most commonly employed by startups and business focused on growth, debt is often secured by the assets of the company including the possible personal guarantee of the owners. As time goes by, the company repays the principal with interest from the cash flow generated by the business activity. This type of lender is not usually willing to take big risks, but the major pro here is that debt does not impact on your ownership. You own as much of your business as you did beforehand.
EQUITY
Equity means investors take pieces of the pie, owning portions or percentages of your business, usually but not always determined by the value of the business and the lending amount. The challenge here is that valuing a business is subjective - investors will seek the lowest buy in for the most ownership while owners will push for the opposite. The major pro here is more of a partnership is formed, with the investor being, well, more invested in the business enterprise and its success.
When raising capital, ask these questions:
- How much do I need? Be realistic, create a comprehensive plan and overshoot for the sake of not having to ask twice.
- How will I raise the money? Insert the debt/equity argument here.
- What is the valuation of my company? (What is it worth today, what is it worth in the future, how long will it take, how likely to succeed?)
- Who are my target/potential investors? What else can they bring to the table besides money?
If you feel the threat of debt looming, or feel like you are sinking, start simple.
Revise your budget, trim the fat, prioritise your debt, negotiate with suppliers and invest additional time and energy into collecting outstanding debts.
