The Three Stages of Raising Capital for Entrepreneurs
In order to fulfill their vision, entrepreneurs oftentimes need capital. Many entrepreneurs may be experts in running their business, but they do not always possess the skillset or the patience to pursue the sources of funding needed to enhance their business.
Entrepreneurs who prepare and plan for their future needs in support of their business growth will avoid finding themselves in a desperate capital crunch. Even though there is no perfect time to raise capital, with the right professional guidance, most businesses can successfully obtain the capital it needs. And with the assistance of a skilled investment bank like Allegiance Capital, business owners can properly prepare their companies for a capital raise.
Investment bankers can assist in the capital raise by performing an objective evaluation of the business, identifying its strengths and weaknesses, and delivering an actionable plan by which the business can access the capital markets. Attributively, this will improve the company’s performance levels, which can help the business owner achieve a premium price should they ultimately make the decision to sell their company.
1. The Early Stages of Business
This is the most common stage when business owners seek an infusion of capital to start or build their businesses. Shortly after the birth of a business idea, entrepreneurs often turn to friends, family, Small Business Administration (SBA) loans and, depending on their net worth and based on the size or scale of the business and its unique value proposition, they may also seek investments from the capital markets. In this stage, the best-laid out plans and presentations can fall on deaf ears if the entrepreneur isn’t in front of a receptive audience. In the vast majority of cases, raising capital isn’t about what you know, it’s about “who” you know and their willingness to participate in your vision.
This is where business owners can benefit by bringing in investment banking professionals to guide the capital raising process. When seeking funds in the form of debt or equity, an investment banker can provide insight, experience and most importantly, a network of contacts that trust their recommendation.
2. Growing Pains
Access to capital is critical during the growth stage of a small business, so business owners need to be proactive and not wait until the need arises. Owners of small to medium-sized businesses should always have ready access to additional funding to fuel innovation, research, development and even to weather a downturn in tough market conditions. The growth stage, however, can be a particularly challenging time to raise capital because while the entrepreneur can see the potential, they may face skepticism from traditional lenders and potential investors. Experienced investment bankers like Allegiance Capital’s M&A professionals will pool together their team’s network to access the best debt and/or equity solution providers who will offer the most synergistic partnerships. This process allows entrepreneurs to continue to focus on operating their business, rather than falling into a “hamster wheel” scenario where raising capital becomes the business owner’s full-time job.
3. Losses and Negative Cash Flow
While unpleasant to discuss, it is wise to give prior consideration to the possibility of experiencing a loss or negative cash flow stage. Whether as a result of business cycles, management or cost overruns, entrepreneurs especially need to be prepared to raise capital during this period in spite of the company’s economic downtrend.
Many entrepreneurs may not be aware that Allegiance Capital also has access to distress lenders who can provide equity injections or debt solutions for struggling companies. These capital providers have the knowledge and understanding that these struggling companies need funds to be turned around. These distress lenders trust an investment bank like Allegiance to provide an evaluation of the business which includes identifying strategic advantages or unique selling points. This evaluation oftentimes highlights a capability that was overlooked. Business owners place a great deal of attention, as they must, on operational matters in the workplace, so they may not notice the alternatives available to them for future growth.
The Advantages of Working with Professionals
The primary role of an investment bank like Allegiance Capital is to help entrepreneurs develop an exit strategy, sell their business, and achieve premium financial benefits beyond their expectations. However, not every business is immediately ready for this type of transition. By helping business owners raise capital and create an attractive ‘structured package’, an investment bank like Allegiance Capital can create demand in the marketplace for the company while enabling it to obtain far more competitive sale terms for the business that surpass its owner’s expectations. Raising capital can be especially important for business owners contemplating a sale. Just because a business owner is ready to sell doesn’t always mean that the business itself is ready to be sold. It is important to “structure” the business in order to create an appealing package highlighting the business’ strengths and unique selling points for potential buyers.
If you are contemplating a capital raise, remember that an experienced investment banker can help you obtain the capital you need in order to fulfill your vision while allowing you to focus on what is necessary to operate and grow your business.
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