Raise the cash first, then launch the business

All to often, one starts a new business without any cash, fully believing that new business will bring in the necessary cash required to fuel the launch and then support ongoing growth and development. This is a tough way to go and frequently results in disaster sending the entrepreneur out to raise capital, after the fact, or worse yet, while attempting to do business as best as you can under dire circumstances.

My first reality check is to inform you that raising capital is a full time job and must be committed to prior to launching the business. Much must be done. First writing a reasonable, practical business plan is a critical and necessary component for a host of reasons, not the least of which is the basic requirement for raising capital is a business pan and a three year cash flow proforma. Second, this is the only way you can effectively project how much cash you will require for the plan you have designed, thirdly it tells whether or not its a feasible plan worthy of investors investing capital and you investing time.

Their are many books available which will help you organize your thoughts and lead you through the steps required to draft an effective business plan. It does not have to be a tome, but it does have to argue your case and demonstrate the business sense and logic that would induce an investor or lender to participate.

The cash flow proforma, the second component of the plan, is critically important and must be done accurately and conservatively, it must be plausible and it must demonstrate the likelihood of the business being able to cover its overhead, pay its debt service and earn a profit, or whats the point. I strongly recommend you show the cash flow proforma to a neutral third party and argue your case seeing whether or not the logic is clear and the argument persuasive.

Once written, of to the banks, friends, family, in search of a white night who will act as a savior and lend or invest adequate cash to support the launch and give you a chance to do what you can do to deliver the conclusion, a successful business.

You cannot give enough back to the investor lender in appreciation for their investing capital in a very risky venture, unproven and completely unreal, a dream not yet converted to reality, your dream.

I therefore recommend a two fold approach to private lender/investors. Offer them a high interest yield in the early years with an opportunity to convert some of the debt to stock if the business explodes into profitability and runaway success. They should have both ends and the middle as a return for the risk and faith they are demonstrating. You may also want to include a buy out option for you to retire the stock so you can regain total control at some later date.

Collateral is always an issue and while difficult to invent, if there are opportunities for collateral you should secure them and then use them to create cash as investor lenders are far more comfortable with collateral and thus can avoid the hard issue of pure risk. They are covered thus the decision is lots easier and the cost of borrowing allot less.

Please explore SBA loans as a high priority, as they are in existence to fund small business risky start ups but be aware you are wasting your time if your personal credit score is below 600 and it should be above 680, if it is, there is an excellent chance this may be a way to go and should be explored as an early option.

If your credit score is not there then you should immediately have your score repaired to make every effort to get the scores above 680 or at least as high as possible, this is a huge issue and should be addressed as a priority as soon as you are aware you will be in the capital market.

It makes terrific sense to hire a name brand accountant and have him review your proforma and business plan and possibly provide projected financial statements as well.

Best yet is asking him to make introductions for you at the SBA, Banks, and possibly even going with you to the appointment. This adds huge credibility and is a wonderful strategy.

When dealing with friends or family another best source for funding, please create notes and do business as if it were with strangers, it saves you from disasters later on if things go wrong and everyone has a different memory of what was agreed to.

The private investor world is tough and time consuming, go there at your own peril. I wish you well and hopefully you will return with a bucket of cash in a reasonable time, but it is a perilous and long journey and with a very low likelihood of success.

Other options, credit cards,  home equity loans, any scheme that puts some capital into your hands.

If you come up empty or what is available is less then what you projected you need,  you must rewrite the cash flow proforma to reflect the adjustments and make the cash work for the plan and the plan work with the cash available, do not try and force the plan into a smaller cash flow with out making major changes, it just will not work out and you will have wasted the opportunity. Change the plan.

In conclusion, raise the cash first before you start the business, draft a business plan and a cash flow proforma, pursue the SBA unless your credit score is low then have your credit score repaired to be over 680 and you will then qualify for a loan..this is a best case scenario, pursue it.

If you borrow from friends or family use notes and treat it as a business loan. Use your home equity as a last case option. Change your plan to meet the requirements of the amount of cash you raised.

Then do your best its all one can expect and do not co-mingle personal spending with business spending, keep it separate. You are entitled to a pay check but the business check book is not your own personal account, not with investors or lenders. involved.

If you raise enough to launch, and successfully start the business, please distribute timely and relevant financial reports monthly and strategy updates frequently to all involved, let them know the good the bad and the ugly as it occurs, you will not be sorry and you cannot communicate enough.

Good luck I wish you well and success in both raising capital and launching a successful business. Call if you get in trouble or need some help.  413-549-2966.