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4 Variables to Consider When Financing Your Company

Every company executive wants to grow their business. It means more cash in the business at the end of the year, more options for selling to acquirers and investors, and getting more enjoyment out of going to work every morning. And there are a lot of ways grow a business. Some companies look to raise debt from outside capital providers to make acquisitions. Others reinvest every penny into the development of innovative product lines. Still others raise capital to spin off their latest IP into new businesses. Whatever your goal, you should consider these four variables before raising capital:

Allocation of capital

Companies’ balance sheets are delicate and precious. Depending on the current state of your company, how much or how little capital you inject into the business can have serious implications. By raising too much capital, you can overexpand into too many new projects or invest too heavily in experimental product development. Don’t overheat. Alternately, being too conservative you can under fund your business and potentially miss an opportunity to hit a new growth curve or even worse – set your company on course for eventual bankruptcy. Before projecting future needs, discover where you are at. The first step is to sit down with your outside counsel including your legal team, CPA and/or accountant, and any other consultants to honestly assess the current financial performance of your company. After assessing the current state of your business, discuss honestly and openly with your management team your future goals and then what you will need to achieve them financially. Being clear on where you are and where your company is headed will ensure you’re clear to pursue any future financial conversations.

Type of capital

Local and community banks are merging left and right (insert article link?). Since the fall out of the banking system, the implementation of Dodd-Frank has overhauled the entire financial structure of the US economy. The short answer: capital has become much harder to get on favorable terms. Forward-thinking executives have gotten in front of such trends by building long-term relationships with capital providers across the capital structure. Depending on your company’s objectives, you could need anything from mezzanine debt to government industrial bonds to venture capital. Despite the current state of your company, trusted relationships with capital sources across the private market ensures the long-term stability and success of your company.

Capital in context

A CEO recently told us the story of how after nearly a thirty year relationship, his local bank refused to fund a new (and admittedly risky) product line for his company. The CEO believes this product has stood all of the necessary tests and is ready for commercialization. The CEO admits that he did not ever think that his existing bank would ever turn him down. Thankfully the company is now having conversations with various venture capital and mezzanine debt providers to get this produce into the market. But, his process would be much faster and less stressful if he had developed these relationships before he needed them.

Investors, lenders and acquirers almost always prefer to give capital to companies they’ve seen grow and change over time. In order to ensure you business’ continuity you must have a wide range of relationships and raising outside capital is no exception to this rule. It’s important to know the professionals that you’re going to begin working with for the first time while strengthening existing relationships. Constant networking and proactive outreach to new types of firms can help reduce the risk of failure in your business. Start building the relationships today, long before you need them. As Harvey Mackay used to say “dig your well before you’re thirsty.”

Timing

Interest rates are the lowest they’ve been for decades and the government shows no signs of stopping the free flow of money into the US economy. It may not seem like timing is an issue – at least for the foreseeable future. However, banking regulations have not been this tough since the Great Depression. This isn’t the 80s or late 90s when anyone with a little bit of revenue and a decent idea could get as much money as they wanted. While you don’t always have control over the timing of your capital needs, it’s critical to understand when it’s the right time to do different types of transactions.

For example, selling a bank today would net right around 1x book value where a few years ago they were trading for 2-2.5x book value. Selling today if you ran a bank, unless you were forced to sell, would probably be a bad idea. As an executive, you are focused on your company’s success and delivering value to your customers. To ensure timing, it is essential to have constant access to industry-specific advisors, capital providers of all types, and your trusted banking contacts.

 

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