Raising money from a bank is hard when you are getting started. This is especially the case if you have not raised a large amount of equity, or when you are not investing the money into liquid assets.
Raising business finance can often be one of the most challenging times for an entrepreneur. However,
part of entrepreneurialism is perseverance and determination. You have to be prepared for getting knocked down if you want to succeed.
A Silicon Valley entrepreneur was recently quoted as saying he believes an entrepreneur should pitch 30 venture capital firms; they should expect to get 3 offers; and then they should go onto pick the best. This is a gruelling process with a 90% failure rate. You should take on board the comments of those that knock you back, but you shouldn’t assume that everyone will feel the same about your idea and your business plan. Entrepreneurialism has lots to do with believing in your idea, but it is also possible that you will have to adapt your business plan to cater for investor appetite, market dynamics or a range of other factors. In many cases, in the vast majority, the business won’t raise a penny. You’ve got to stand out from the crowd. Following are the ways that you could finance your business, and get your entrepreneurial journey off to a start.
Loans
Raising money from a bank is hard when you are getting started. This is especially the case if you have not raised a large amount of equity, or when you are not investing the money into liquid assets. Factors such as the competence of management will also play into how safe the bank would consider the investment. An entrepreneurial company will often consider approaching managements’ family and friends to see if they are able to offer a loan – although there are many downsides to this approach, it’s often one of the only ways to get off the ground for some entrepreneurs.
Sometimes it’s easier to get a loan when your company has a stronger balance sheet through raising equity. Bankers will often talk about the leverage that a business has. This refers to the ratio of equity to loans that your company uses to finance their business. The lower the ratio, the better your creditworthiness, and the more likely a banker will be will be willing to offer a bigger loan at a better interest rate.
When you leverage up your business more, you are likely to be able to increase earnings per share, however you also make your business less stable. Your entrepreneurial mind may be torn between equity dilution, growth and stability. Keep in mind, slow and steady doesn’t always win the raise. Entrepreneurialism is all about accepting a degree of measured risk; you have to decide how far you’re willing to take it in the interest of shareholders.
Equity
It’s sometimes easier to raise equity finance, as a small business, than it is to go to the bank. This is especially the case if you will be investing in intangibles, or an IP-heavy business. Entrepreneurialism tends to be financed by equity investments, more so than loans, for companies that will take longer to reach profitability. Although there are investors who are willing to look at companies in all sectors and at all stages in their growth cycle, you’re more likely to get a favourable valuation if:
• You have a unique idea, a protected idea, or you are likely to benefit from a first movers advantage. Entrepreneurialism, passion and expertise are all extremely important factors too.
• The more progress you have shown, in terms of product development and sales, will always act in your favour. Entrepreneurialism isn’t just about writing business plans; this shows your plan works and you have what it takes.
• Financials are important too. The stronger the balance sheet, the better the cash flow, the more profitable your company is now – the better. However, earning potential will play an even bigger role in small investments with good growth potential.
