Pros and cons of raising capital

Steve Murphy

Steve Murphy

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Pros and cons of raising capital

Raising capital is a surprisingly difficult task for many business owners, from choosing between debt or equity to finding the time and energy to convince investors on top of running a company. Learn more about the opportunities and challenges for business owners considering a cash injection.

The challenge of securing capital to grow a company can be both exhilarating and daunting. Get it right and those scale-up dreams are likely to come to fruition, while getting it wrong can seriously derail your plans. Entrepreneurs cannot escape these challenges  but, by knowing what they are, can at least prepare for them.

Tip 1: raising money takes longer than you think

In emerging companies, owner-managers devote as much as half their time and a lot of creative energy trying to raise external capital. Some founders drop nearly everything else they are working on to find potential investors and tell their story.

The process is stressful and can drag on for months as you search through potential funders for the right fit and ethos. Even though approval is relatively straightforward, the challenge for owners is getting their story together, preparing presentations for the ‘roadshow’ phase, and gaining the attention of the right contact within each institution. Many VCs can be more risk averse than owners expect.

When a company is growing rapidly and directors are ‘maxed out’, the focus on finance often means less attention is given to cashflow, employees and customer relationships culminating in a negative impact on revenue, margins and profit.

Tip 2: Capital can cost more than expected

Even if the search for capital is successful, out-of-pocket costs can be higher than expected. Bank loans over £1m tend to require stringent audits, business valuations, and legal fees for contracts – and the business has to shoulder these costs.

Business owners need to understand and factor in these costs before setting out to raise capital.

Tip 3: Keep other potential investors warm

When a business owner finally secures growth finance, most shake hands and sign the terms, then relax – cutting off discussions with alternative sources of funds. This can backfire.

If businesses start to miss their KPIs, that lender may start getting cold feet at evaporating margins and start demanding warranties or an equity stake for a bargain price.

Growth entrepreneurs always need to think of the next funding round.

Tip 4: Let advisors take the strain

An experienced corporate finance advisor is invaluable in doing much of the heavy lifting while entrepreneurs carry on with day-to-day operational matters. They help owners put together the investment prospectus, screen and vet initial interest, and schedule an investor roadshow.

With thousands of venture capital funds, and a myriad of alternative investors available (asset finance, bridging loans, mezzanine finance etc), this huge workload is enough to put any business owner under huge strain and prone to make mistakes.

However, business owners should choose a corporate finance advisor carefully. Those with strong ethical credentials are better placed to give an honest appraisal, with judgment not clouded by the desire to secure their fee regardless of the merits of the investment offer and terms.

Many advisors also partner with experienced corporate lawyers who are highly efficient at working through the smallprint and highlighting risks.

Conclusion

Taking into account the factors above, entrepreneurs should be wary of setting out on their own to land that six or seven figure investment. Despite the pitfalls, thousands of SMEs and start-ups borrow significant sums every year to accelerate growth.

In today’s business world of intensifying competition, demanding customers and skills shortages, scaling up fast goes hand in hand with the ‘grow to sell’ model of many business owners. Doing nothing carries its own risks.

CapEQ helps business owners navigate the investment world to secure capital for growing companies and is both FCA-regulated and an accredited ethical ‘B-Corp’ business. We can help assess options.

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