Moving on from last week where we discussed the benefits of Business Planning, we take the next step in the series of four with the topic of Raising Capital.
Whether an organization is large or small, there are similar thoughts and evaluations that need to be carried out before entering into the process of trying to raise capital.
Many companies feel the need to raise capital due to increased growth pressures, but certain questions should be asked beforehand.
Firstly, you have to ensure that it is an essential requirement for you to be looking for increased funding, as there is no point in tying the company into potentially expensive debt or equity funding unnecessarily when existing resources within the organization are not fully utilized.
Questions to ask
Once you have decided that you do require funding of some variety, you would need to sit back and look at the overall picture, asking yourself the following:
Is the company able to attract capital in its present position?
Does it have the necessary strategy and specific actions in place?
Does the company have an implementation plan for effectively managing the existing capital and investments, as well as the ability to manage additional funding?
Does the company have the required internal controls in place in order to minimize risk within investment and cash-flow decisions? (an area we will look into in more detail in next week’s article covering internal controls).
Once you have considered the above, and are confident that you are in a position to go ahead and raise capital, you would need to consider the type of lender/investor available.
Again this will depend on the type of growth the organization is striving towards and level of involvement you require from the investors.
If you are looking for a high level of involvement from investors and are in need of help with future financing requirements, you may be looking for long term investment.
Should your company require an investor that can also act as a strategic partner and help to attract potential customers and suppliers, you would look to use investors for value added services. In such cases, you would also need to consider potential dilution of ownership, as an investor may demand a certain level of control over the organization in exchange for the level of funding provided.
The above options all require external funding but lead the organization in different directions. Management need to know which direction they are aiming for before embarking on such a task.
Equity vs. debt financing
In deciding on the direction to go in, you will come across the decision as to the type of capital you want to attract, and which would be most beneficial to your organization in its current position.
Overall capital is made up of debt – lending based, and equity – investment based.
Equity investors range from family, friends, business associates, and also include larger scale angel investors and venture capitalists. If you choose to go with this route, you need to be prepared that equity investment can be more expensive than debt financing, particularly as venture capitalists are looking for higher rates of return due to the nature of the returns payment whereby they have the last call against the company’s assets.
If you decide to go with debt financing, you may also find yourself approaching family and friends, or for more structured financing, require the services of banks, which provide short and longer term lending ranging from demand loans, seasonal lines of credit and single purpose loans.
Generally, to attract debt financing, which includes lending from banks, you are expected to meet certain criteria, starting with a written proposal.
The company must ensure it makes its best presentation on the initial loan proposal and application as this provides the first impression. You may not get a second opportunity.
Going back to last week’s article on business planning, you will also need to provide an executive summary, which you will already have prepared as part of your business plan. To compliment this, a clear and concise cover letter will bring everything together.
There are several different loan proposal formats available. Contacting your potential lender and discussing their specific requirements is advised, thus ensuring your ability to meet their requests.
Essential information required by the lender will include:
a description of the business,
key management experience
loan repayment sources and timings schedule
company financial statements
projection of future operations covering at least the next twelve months (all of which form part of the business plan)
personal financial statements (for small business entities)
listing of available assets for collateral
industry specific details to give the lender a more in-depth understanding of your company
details of other applicable assets and liabilities, for example, existing leasing arrangements, franchise agreements, partnership agreements
To give your company the best chance of gaining the capital it needs, here are some pointers to consider.
Shop around, the banks are an option, but so too is renting and leasing if you are looking to acquire larger items such as machinery.
Keep your financial records in good order; these are the driving force of your proposal.
Keep the people that matter informed; you will retain a better relationship with your lender if they can see how you are progressing.
Do not be afraid to negotiate, all elements of the lending process are flexible; ensure that you obtain a deal that is tailored exactly for your requirements.
Overall, raising capital is a plausible process for any business providing you plan, take your time and obtain the right professional advice when needed, thus preventing one of the biggest causes of business failure which is inadequate or ill-timed financing.
Next week we will take the third step in the series of four and look at Internal Controls within the organization.
Tracy Lees is a senior accountant with Deloitte Consulting. She is ACCA qualified and has over seven years of offshore experience. Deloitte Consulting provides a wide range of economic and business planning services including detailed business plans, business and marketing strategies, financial analysis and feasibility studies and business valuations.