Why Too Many Entrepreneurs Don't Know How to Raise Capital
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Having spent more than 30 years financing small companies, I've seen some interesting deal flow at every imaginable business stage. From 'back of the napkin' concept to a mature enterprise being acquired by a larger company, there are all kinds of people and transactions that define business opening and closing, starting and stopping.
Somewhere along that path the term "entrepreneur" became fashionable and replaced "business owner." Unfortunately, a few entrepreneurs forgot that this newly-branded category is still a business. Immersed among the tasks of inventing, bootstrapping, branding and social media is the original goal of creating, sustaining and eventually exiting a profitable business concern.
Regardless of sector or size, companies wanting to expand sales, production and profits must have funds to hire people, buy equipment and acquire larger facilities. And much of that capital will come from credit financing.
One of the most repetitive news stories over the past five years has been that the American economy remains stuck in a credit crisis. Today American banks are sitting on about two trillion dollars, waiting to lend it to qualified borrowers. And while many have tightened lending standards from the good old days of 2007, there is still room to negotiate reasonable credit on good terms.
In my opinion, the idea of a credit crisis has been exaggerated. The real crisis may be potential borrowers not understanding how to qualify for capital or their unwillingness to acclimate to the demanding requirements of most third-party funders. To be sure, it's not an easy process, but it never was.
In an age where everything seems to be demanded instantly, busy people sync digital devices to their workflow, communicate hands-free and are impatient that email is too slow. Some refuse to acquaint themselves with a process that requires deliberate analysis, time-consuming due diligence and a waiting line. Bank business lending isn't broken down to digital metrics or instant score modeling that can spit out the answer in seconds.
Many small-business owners have an astonishingly low understanding of basic accounting. Some cannot distinguish cash flow from profitability and apparently believe that a checking account statement is the same as a profit/loss statement.
Compiling, tracking and analyzing financial results is the most tedious part of business ownership, but it's necessary in order to establish that a business is working as it should. Beyond profitability, it's vital to understand the relationship between revenues and costs as well as expenditures and receipts. Great products don't have much value if you can't sell them for a profit.
Maybe the fun part of owning a business is actually doing what you do. Developing software, solving problems or repairing automobiles are all unique pursuits that require special skill. But after those duties are finished, there has to be an accounting for what happened, or in business terms -- breaking it down to dollars and sense.
While many entrepreneurs get frustrated at the seemingly impossible task of securing funding, many are simply unprepared for a rigorous examination of their financial results or meeting someone else's standards.
Bottom line -- if you don't have financial metrics, you will forever be blocked from bank funding. Count on it.