If you’re starting a business, chances are good that raising capital is part of your to-do list. So how do you do this?
Here are tips that will increase your chances of getting the money you need.
Know Your Investors’ Limits
Everyone – whether they’re a wealthy doctor or an amateur investor – has an investment plateau. It could be $10,000. Or $100,000. But whatever the amount, you won’t have a chance if you go far above it.
Find out the plateau of the people you’re trying to reach in advance. If you can’t ask them directly, talk to accountants or financial advisers who know the investment threshold of people like those you’re trying to approach. Then you can tailor your offer to make it easier for them to put in the amount they’re comfortable with.
When you’re out looking for money, allow room for failure into the process. Include three long shots in your list of potential investors. Approach them first, knowing that you’re likely going to get turned down. But don’t get upset. Profit from the experience.
By creating a questionnaire and going back to the people who rejected you. Tell them that you respect their decision, and that you aren’t asking them to reconsider. Say that you just want to learn from the experience, and that you’d be grateful if they’d explain why they said no.
Was it something about the business plan? The amount of money you were asking for? Something about you personally? Tell them to be completely honest.
With a better sense of what investors are looking for, you can go back and improve your presentation. Now, with confidence, you can go to the people most likely to give your their support.
Cement a Banking Relationship
Once your business is up and running, you’ll need to focus on building another financial relationship – one with your bank. Here are five ways to do this. Ignore them, and your bank may drop you as a customer.
Submit Financial Statements On Time
Banks are in business, just like you are. What’s more, they have more regulations to deal with than you do. Regulators check their records every year. Internal examiners look at them every quarter.
If you don’t submit your financial statements on time, your records will be incomplete. This causes problems for your banker, who gets rated on the accounts she’s monitoring. You’ll have a strike against you.
Bankers have questions about your statements, but you may not know the answers. Yet instead of having an accountant give the required information, some people try to talk their way out of the situation by giving weak responses that don’t add up.
Then when examiners come and ask the banker the same questions, he can’t give an adequate answer. He gets hammered as a result, and you’ve got another strike against you.
Nurture the Relationship
It’s easy to ignore your banker when you don’t need anything from him. After all, you have more important things to focus on, right?
Yet by the time you do need something, it may be too late. If you haven’t built a good relationship, you may leave empty-handed. That’s why you should meet with your banker regularly.
Keep them Informed
You don’t like big, bad surprises, do you? Well, neither does your bank. Sure, unexpected things happen. But many problems can be anticipated, and bankers want to know about them as soon as possible.
Because they want to know that you’re in control of your business. That’s why they ask for annual forecasts. If your projections are always way off, they’ll think you don’t know where your business is headed. Or that you’re dangerously overoptimistic.
Obey the Rules
When a bank lends you money, there are strings attached. These strings are the covenants in the loan agreement.
Some people either don’t understand the covenants, forget about them, or just plain ignore them. But that doesn’t make them go away, or excuse you from following them.
The bank’s money is not your money. They have every right to ask for their money back – if you violate the loan covenants.
Your Inner Bank
What do you do when credit gets so tight, that you can’t get a loan no matter how hard you try? If you bill your customers after you deliver your product or service, you have an extra source of funds- your receivables.
Receivables are, in essence, loans you’ve made to your customers. As such, it makes sense to monitor the quality of your loan portfolio.
Unfortunately, it’s easy to lose the discipline of tracking your receivables as your company grows – especially if you have strong cash flow and money in the bank.
But this is crucial if other sources of cash dry up. Here are important questions to ask regarding your receivables.
- Is it taking you more time to collect than it should?
- Is your average collection time increasing? If so, why?
- Do your customers need to be called more often?
- Are some struggling because they have their own problems? If that’s the case, consider working out new terms with them.
- Are people blatantly taking advantage of you? If so, you might want to apply more pressure. And if it’s really bad, maybe you should terminate their account.
For more tips on raising capital, check out The Knack by Norm Brodsky and Bo Burlingham.
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