Raising Cash Doesn’t Have to Be So Painful

By Dennis Michaels

Whether you’re a start-up chasing seed money or a small- to mid-sized business looking for expansion capital, a weak economy makes the process of raising money more difficult.

You may not be able to control the economy or the decisions of investors or lenders, but there ARE steps start-ups and SMBs can take to avoid some of the pitfalls and make the process as painless as possible.

Is It Necessary?

The first question a business should ask is whether they actually need to seek outside funding. For new businesses, more time may be spent chasing expensive money than developing a lean funding plan that would permit the business to achieve revenue, break even or hit some other milestone that would greatly enhance their chances to secure financing in the future on better terms.

Is there a lower-input path for the business to follow that would eliminate or reduce the need for outside funding to begin with?

Executing on that plan may not only make a business more attractive to would-be investors and lenders, but may remove the need to seek outside funding in this difficult climate. The old adage remains true that it’s easier to raise money when you don’t need it.

Plan Ahead

Regardless of the form of financing you may be seeking, universally, the funding process is taking substantially longer than in better times.

Even businesses with long-term relationships with lenders are finding that banks’ underwriting processes are more stringent and taking longer to complete. This can turn a routine renewal of a line of credit, loan agreement or equipment financing into an arduous, time-consuming activity.

The process is even more difficult for start-ups. Many newer businesses are finding that some of these alternatives simply don’t exist for them — at least on terms they can live with.

Anticipating your needs well in advance is key to making sure you don’t run out of runway before the deal closes. For many businesses, the funding process may need to start more than a year in advance of anticipated need.

Expect Scrutiny

Heightened underwriting standards and more in-depth due diligence investigations are big contributors to the additional complexity and delay associated with current financings.

One way to mitigate these problems is to put yourself in a lender’s or investor’s shoes and conduct an honest and thorough examination of your business.

Addressing soft spots in recent financial statements is a good place to start. Develop a plan to tackle any problem areas before seeking financing. Given enough time and effort, businesses may be able to improve their situation.

For example, a business may be able to improve receivables aging through stepped up collections or negotiated workouts with troubled customers, reduce excess inventory, or make other changes to reduce the overall burn rate. Not every problem can be solved, but with enough lead time, business owners may be able to improve problem areas to change a negative trend into a positive one.

In this economy, flat is the new up.

A focus on financial statements is just the beginning. Businesses should also examine their customer and vendor relationships. Are key long-term contracts due for renewal?

Starting (and concluding) that process early may allow businesses to improve the predictability of both the revenue and the expense side of the ledger. As a result, when an investor or lender is investigating the company, the uncertainty of renewing or extending key contracts is already off the table. Any reduction in future uncertainly is a good thing.

Expect Harsher Terms

In addition to increased scrutiny, investors and lenders are increasingly asking for more in financings of all kinds.

Unsecured credit often becomes secured. Borrowers may be asked for personal guarantees where none were required in the past. Valuations may be substantially lower, resulting in greater dilution and more onerous terms.

These market trends are difficult to avoid, but with time, businesses may be able to maneuver themselves into a place where additional credit enhancements and investor protections are less necessary.

For example, personal guarantees might be avoided if the business were able to conserve cash — through better cash flow management or by modifying customer contracting and payment terms — and use that cash to post a standby letter of credit, make a deposit into a restricted account or otherwise address the lender’s concern.

Develop a ‘Plan B’

Finally, plan for the worst.

If funding isn’t available on favorable terms, or at all, are there contingencies a business can pursue on a parallel track with funding efforts? Bootstrapping, relying on organic growth, pursuing grant funding or using creative solutions like crowd-sourcing may permit the business to continue to grow even without traditional financing alternatives.

In some cases, these alternatives may be less palatable than traditional methods — but ultimately may be the ONLY alternatives in a difficult funding environment.

Dennis Michaels is an experienced business lawyer focused mainly on start-ups, angel and venture capital financings, mergers & acquisitions and corporate law. Dennis advises entrepreneurs, investors and companies about business issues throughout the corporate life cycle from formation through finance to exit. You can e-mail Dennis at DMichaels@boutinjones.com

This information is for educational purposes and does not constitute legal advice. No attorney-client relationship is created with the reader. Always consult with your own attorney about your specific situation. The views here are those of the author and not of Boutin Jones Inc.
Originally published: Dec 13, 2011

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