Strategies for Raising Capital
During times of modest business growth, it is important to choose the right lender. Raising capital can be among the biggest challenges, so business owners should start by thinking the way lending institutions do. If business owners understand what the lending institutions look for, they can put their business in the best possible shape to secure financing.
Each lender has specific criteria that reflect its lending portfolio and experience, but most look for these standards:
Years in business: Five or more years in business, with two to three years of profitable operation.
Operating trends: Upward trends in revenues, earnings and cash flow. Audited or reviewed financial statements are preferred over tax returns.
Balance-sheet strength: Strong equity. How do your assets-to-liabilities ratio and profit levels compare to those of your competitors?
Ability to repay: Cash flow sufficient to service the debt.
Collateral: Sufficient collateral: accounts receivable and inventory for short-term loans; equipment and longer-term assets for long-term loans; or securities-based collateral.
Credit history: Credit history oprincipal owners if the business is privately held. Resolve outstanding problems in past credit reports.
Business operation and character: Well-run by experienced management, skilled employees, adequate insurance and a good reputation. Press clippings and awards can point to your success.
Revenue sources: Diversified, regular clientele. Have a plan to improve this if you have few customers or a concentrated list.
Your presentation to lenders should be formal, complete and clear. An effective executive summary establishes your goals and credentials and captures the lender’s interest. Complete financial statements prepared by an external certified public accountant can be compiled as part of your tax planning. Brochures and other marketing material help lenders understand your business better and improve your chance of getting the loan approved.
Interview several lenders and compare their financing solutions. The lender you choose should be committed to your industry and have the flexibility to adapt its terms to your business’s individual circumstances.
Invite lenders to visit your facility to meet your key management team. Potential lenders can grasp your financial needs better through an on-site visit and meetings with those employees who could run the business should the need arise.
Think of raising capital as part of a continuing process by planning for longer-term needs today.