DIY capital raising could expose your company to significant risk

DIY capital raising could expose your company to significant risk

Gary Palmer, CEO of Paragon Lending Solutions examines the pitfalls of going it alone when raising capital for your business.

While the President Ramaphosa’s ‘Lions’ are out hunting for foreign direct investment, many companies are still struggling to find access to growth finance locally. Entrepreneurs tackling capital raising by themselves not only risk getting turned down, but could end up securing finance that is wholly inappropriate for their business.

Reaching your next business milestone requires resources. These include financial resources, but also time and focus from the management team. For small and medium companies this can pose a serious challenge.

When looking for growth capital, many local entrepreneurs try to tackle this by themselves, unaware of the considerable time and complexity involved in the process.

It’s not a one-size-fits-all game

One of the biggest mistakes business owners make when looking for finance is underestimating the breadth and scope of the paperwork involved. Misjudging the level of detail required by investors, particularly institutional investors, could seriously trip you up.

What’s more, every lender has different requirements. Some may focus on future earning potential, while others will put their emphasis on past performance, management skills or security within the company.

Entrepreneurs mistakenly think that because they have done one application for a potential lender, they can simply re-purpose the supporting paperwork for others. They are kidding themselves.

We have also seen a tremendous disconnect between what the traditional lenders want and what business owners think they want. Over the years, banks have become more risk averse.

Unfortunately, many entrepreneurs use their business as a personal piggy bank, running household expenses through the company books to avoid tax. Banks will pick this up when they view management accounts and loans will be declined.

This strict lending criteria will mean a lengthy and in-depth due diligence process that will significantly increase the time to secure funds.

What could go wrong?

Sourcing capital by yourself can have far reaching consequences. We have seen many a company realise too late that they may have secured the funds they needed, but that it has come at a cost.

Choosing the wrong product which may have unfavourable payment terms or a higher interest rate could put significant strain on a business in the medium- to longer-term. Not structuring the terms of the loan so it works for your specific requirements can add additional risk to your company and, may even impact your ability to raise additional finance at a later stage.

Another pitfall is that business owners often return to their existing funders, whether their bank or other investors, when they need growth finance. Or, they could approach these same lenders when they have special financial requirements like short-term or bridging finance due to payment delays or other time-sensitive needs. This can cause potential uncertainty in the minds of your financiers or even put undue strain on existing relationships, and so you should carefully consider the potential unintended consequences before going this route.

How to avoid these pitfalls

There is something to be learned from the old proverb ‘a stitch in time saves nine’. We advise our clients that it’s better to prepare and find capital before it’s needed. Last minute, rushed capital raising rounds lead to desperation thinking and that is when mistakes are made. Taking advantage of a less frenetic pace means you can fully explore all the available lenders and products.

It also means you don’t have to walk the path alone. Finding a trusted, independent lender which has access to a network of potential lending partners; knows how to present each application in a way which will be viewed favourably by different institutions; and which can help you negotiate the best terms possible, will optimise your chances of securing the capital and save you money and heartache down the line.

Raising capital is a marathon event. It requires preparation, a solid knowledge of the course ahead of you and, most importantly, should not be tackled alone.

Read more at www.paragonlending.co.za or follow @Gary_Paragon on Twitter or Paragon Lending Solutions on LinkedIn.