This is the final post of a three-part series on capital raising mistakes you can easily avoid.  For the first post, click here and for the second part, click here.

 

Mistake #9:  Not Being Scrappy

 

Scrappiness is one of the hallmarks of being an entrepreneur.  It is the ability to take lemons and make lemonade, get the max for the minimum and generally beg and barter to make things happen.  It’s about trying to find a way to make things happen in alternate ways.  Think of it as being the MacGyver of entrepreneurship. How can you extend payment terms with vendors or get paid upfront for your goods and services?  Both of those efforts will decrease the amount of capital you require.

 

Perhaps you can trade your products or services for legal, accounting or other help? Can you get your website done for less money by using a company located in a less expensive area of the country?  Can you outsource any of your tasks to a virtual assistant, maybe even one overseas? 

 

While you certainly can’t cut out all of the expenses of your business, if you can be scrappy in the early stages of your company, you may be able to achieve critical milestones with less capital, making it easier to do a formal capital raise down the line.

 

How to avoid this mistake:

 

  • Review your plans to see if there are ways to extend payment terms (without incurring penalties)
  • Review expenses to see if there is anything you can beg, borrow or barter for
  • Creatively think about ways you can get paid upfront (in part or whole) for your products and services
  • Continue to think outside of the box

 

 

Mistake #10: Not Understanding Debt

 

Someone along the way must have sent out a memo that was grossly misunderstood because there are lots of misconceptions about debt (loans) for businesses.  From the government giving away money for free (it doesn’t), to the government making loans through the SBA (it doesn’t - it provides “insurance” to lending institutions in the SBA program to lessen the institutions’ risk when making small business loans), there are lots of myths and misunderstandings on the subject.  42201048_s.jpg

 

Lenders take the business of making small business loans pretty seriously. Getting a loan requires one or more of: (I) a good personal credit history, (ii) personal assets/collateral, (iii) business history and/or (iv) business assets/collateral. If your new business doesn’t have major assets, most lenders will want you to personally guarantee the loan with your personal assets, like your house, which adds to your personal financial risk. 

 

If you don’t have appropriate collateral, you may find it nearly impossible to get a loan for the business. Basically, you have to be somewhat successful and have proven your financial abilities to save towards your business in order to get a loan to start a business.

 

Plus, if you fall behind on payments for your debt or if your business is struggling in certain areas and if you aren’t complying with the specifics of your lending agreement (called covenants), the lender may step in and take all kinds of actions that will irritate you but are fully within its right as a lender.

 

Also, many businesses are financed by another type of debt: personal credit card debt.  Credit card debt is very costly and can contain double-digit lending rates. This makes credit card debt a very expensive option, one that may not be able to be made up by the rate of return you produce from your business.

 

How to avoid this mistake:

 

  • Connect with a business banker early to help guide you through the process 

Related: Schedule an appointment with a Small Business Specialist

  • Make sure you ask a lot of questions about what is required of you if you take on debt
  • Don’t sign anything that you do not 100% understand
  • Make sure to keep bank covenants in the front of your mind – even if your business is not in trouble, breaking a covenant can wreak havoc on the business
  • Don’t take out any debt (including credit card debt) at a rate of interest higher (or even anywhere near) the potential rate of return you expect from your business
  • Don’t use debt to bet (or fully mortgage) the farm
  • Remember that your name (and perhaps your assets) is on the dotted line – you are accountable!
  • Look to peer-to-peer lending as a lending alternative

 

Mistake #11: Not Getting Help 

 

So, capital raising can be complicated.  You have to figure out how much money you need (which we have already established is usually more than you think) by putting together financial projections.  Then, you have to think through the pros and cons of each source of capital.  You may also have to put together and review various documents, whether they be loan documents from the bank or a term sheet from angel investors or even just an agreement amongst friends and family. Plus, you may have to set a valuation and potentially file paperwork with various governmental authorities.

 

If you have never done any of this before, it is complicated!  Yet, it is incredibly important and you need to make sure that it is done right and that you understand fully what you are signing up for.

 

The mistake here is not being willing to get help (which often costs money).  You need to hire advisors who have experience with capital raising (not just Uncle Ira, who happens to be a lawyer) to make sure that you are getting the best advice and so that they can educate you as well – ignorance is not bliss in business.  You may pay a little more up front, but you get what you pay for. Also, sometimes a bargain on very important items ends up being more costly in the end if the work takes more of your time or needs to be redone.  

 

How to avoid this mistake:

 

  • Be willing to ask for help
  • Again, use resources like your business banker to assist
  • Review credentials to make sure that the firm or people helping you have experience working with your size company and have capital raising experience too
  • Make sure that you clearly outline expectations and understand exactly what you receiving in terms of advice and help
  • Ask for explanations so you can become educated too – your name is on the dotted line, you will want to “sanity check” all work done for you by any advisors

 

 

Mistake #12: Raising Money to Replace Your Old Salary

 

Before you started your business, you may have had a good salary that helped you pay for nice things, like your home, car and annual trips to Disney World. Once you leave that job to start a business, you may figure (as so many aspiring entrepreneurs do) that you need to replace that salary to maintain your lifestyle.  You decide that since you could find another job that pays that much, you are obviously worth that much and that investors should be willing to pay you that kind of salary for working in your new business.  Plus, if you are raising equity, you also figure that you deserve the lion’s share of the equity stake.  

 

Yeah, that’s not how things work in the real world.  

 

Nobody wants to invest in your salary.  They want to invest in a business that will grow and make them a hefty return.  If you think the idea is so great and you want to keep all of the equity, you better be able to either support that with your own capital or be willing to put in “sweat," the hard work you get in exchange for the equity. That is your payment. 

 

If you want a large salary, that makes you a hired gun, not an owner. 

 

You can expect some small amount of money to live on, but start-ups usually pay below-market salaries to keep costs down.  Asking for a premium salary throws up all kinds of red flags for investors (and they may, in turn, throw-up on your business plan).  It says you care more about sustaining your lifestyle than doing everything possible to make the business work.

 

How to avoid this mistake:

 

  • If you want to make the business a success and have a meaningful stake in it, forget the big salary for a while
  • If you want a big salary, keep your day job

 

 

Mistake #13: Assuming Raising Capital is a One-time Event

 

So, you have written the plan, given your pitch, waited for months (longer than you expected) and finally, the checks have been written and you raised capital. Thank goodness, you never want to go through that again. Yet the capital raising process is rarely a one-time event. As your business evolves and growth prospects present themselves, you have to have funding to grow the business. The more growth you have, the more money is needed to cover working capital items like inventory and accounts receivable. If you have visions of growing, you are going to need to consider capital-raising, whether through equity or debt, on an ongoing basis. Having no capital needs often means you are not growing, which is not a great prospect either. 

 

How to avoid this mistake:

 

  • Get comfortable with the notion that you will have to raise capital over the long-haul

 

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About Carol Roth

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Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

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