For some businesses, finding financing is like attending a business conference where you don’t know anyone, but everyone there seems to know each other. It’s hard to know even who to talk to.
But finding financing is actually a two-way street – while you’re looking for the right financial source, the people with money to provide are looking for the right opportunity to get involved in.
One problem is that just as it’s hard to find the right person in a crowded ballroom, there are serious inefficiencies in the financial matching-up process, particularly in the private capital markets. Experience helping entrepreneurs succeed has shown that they may need help in three key areas as regards their search for finance:
1. Articulate your financing purpose
Your first step is to get a clear idea of the reasons for your need for money, so you can tell a financier why you can be counted on to hold up your end of the deal. If your company is in early stages and not yet earning much or any revenue, for example, your need may be for capital to fund growth. If investors are interested, it will likely be because of the potential for capital growth, rather than dividends.
A more mature business, however, might be looking for expansionary capital, maybe for a strategic reason – to take out a competitor, make an acquisition, or to expand into a new geographic or technical area. In this case, financiers may be more interested in dividends and long-term growth, rather than a quick in-and-out financing deal.
Once you have a clear idea of your financing purpose, you will have a more comprehensive idea of the kind of financial source you need to reach out to – and how you can explain your idea in terms that they can relate to.
The right business advisor, with an understanding of the viewpoint of financial sources, can help you craft that message in a way that hits the ‘hot buttons’ that can help you get a ‘yes’ to your proposal.
2. Match your need to the financial sector’s fast-changing offerings
Just as entrepreneurs are always developing new solutions to the needs of their potential customers, the financial world is constantly innovative about ways to meet the needs of businesses.
For example, some financial sources focus on working with Software-as-a-Service companies, tailoring their financial offerings to meet the cash flow and expense patterns of the SaaS sector. Others focus on working with companies that want to install new lighting to make their premises more energy efficient, and will take a share of the resulting savings to repay the financing they extended. There is a wide array of financial products available, and one of these innovative niche providers may have something that fits your situation.
While some financial sources continue to offer the same products year after year, others pop up quickly and if there is not enough interest in the terms and conditions they offer, will disappear just as fast. This part of the financial world is something like a fast-fashion retail store – racks of clothing go out on the floor to see if they will sell. If sales are slow, those products are pulled quickly and replaced with new merchandise. It may be hard for you to keep watching the whole store to see if something pops up that meets your needs.
In financing as well, it can be hard to keep track of what’s available in niche financial products – so it helps to have an advisor who is well plugged into the financial world and able to point you towards the right opportunity.
3. Understand and meet your regulatory obligations
It could be that equity finance is the best option for you, and this involves wading into a complex world of regulations designed to protect those participating in the markets. In particular, those regulations are set up to protect investors whose hunger for high rates of return is greater than their understanding of the risks involved.
As a result, entrepreneurs seeking financing from the investing public must understand the regulations, particularly around the information that regulations require them to provide, including formal documentation and disclosures.
One of the most important questions you need to answer is whether a formal prospectus is required. Because of the amount of time and effort involved in preparing a prospectus and to meet the resulting obligations, many private businesses seek to rely on any of several prospectus exemptions that will allow them to avoid having to prepare one. A good financial advisor can help you determine if you need a prospectus, or if there is a way to structure your offering so you can comply with one or more prospectus exemptions.
Getting support from the right advisor
To achieve your financial goals, it helps to work with an advisor who:
- Understands capital formation and strategy from the entrepreneur’s point of view and can help you set up your accounting and operations system to provide the data financiers need
- Understands the financial sector and how they look at finance opportunities (including potential deal-breakers), and has a finger on the pulse of new financial offerings
- Can help you understand your financing options, and can prepare documentation that will state your case in terms attractive to financial sources
- Can help you meet regulatory requirements, particularly around equity finance
