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Question added to topic MoneyOctober 27, 2010

When's the best time to seek additional financing for my startup?

I started my golf products company two years ago and I now need about $20,000 for manufacturing in China. I have the trademarks and patents for my products.
Congratulations on achieving two key business milestones: developing a patented product and generating revenue. Many startups never even make it that far.

The timing of when a startup should seek additional financing really depends on the specific circumstances. Although you have provided some background information, I don't know your company's key financial information such as your debt position, cash balance, working capital and business pipeline. I think answers to these questions below may help in your decision making process.

Are You Meeting Current Debt Obligations?

Many startups that do obtain financing do not ask for enough capital from the lender, whether it be a bank or independent investor. They feel the need to impress their investors and/or themselves by asking for just enough capital to get the business off the ground. Big mistake, as there are many costs that a startup never even incorporates in their business plan.

The result is that they start to burn cash quickly and have trouble meeting their interest payments. If this is the case, you can try to obtain additional financing from investors but it is not going to be easy. You will really need to focus on how you have corrected past mistakes and have a fairly robust business pipeline such as firm commitments from a large distributor (i.e. sporting goods retailer).

How Robust Is Your Business Pipeline?

It seems as though selling your golf products through a large distribution channel such as a sporting goods retailer offers the most potential for growth. However, reaching an agreement with a large retailer will be tough since your company is a startup.

The retailer will probably want to see a track-record first before committing to tens of thousands of dollars worth of product. I would ask myself, "how strong is my relationship with these potential distributors?" Perhaps, you need to prove out your business model further by selling the rest of the product in the first container.

The last thing you want to happen is to obtain additional financing for the product and then have the retailer back out of the deal. Part of being a good entrepreneur is taking risks at the right times. Is this the right time?

I wish you luck with your endeavor.

Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys.  His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.

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