I get a lot of calls from business owners looking for help to raise cash.
While that is something I can do, most of the time I recommend against raising cash. Why? Read on.
There’s an old expression about lending that goes “banks only lend money to people who don’t need it.” That is a good guideline. If you are raising cash to keep your business going, you would be far better off addressing the underlying problems. Adding debt to your stress won’t help. A business owner who tells me that sales are off but if they had money to advertise they could turn things around, is wrong. If your business is in trouble, it’s time to get serious about your business model. Fix that first. Advertising will only help a successfully functioning business.
There are businesses that are making a lot of sales and growing at a fast rate. It feels like things are going well but could be going better with a cash injection. That’s not true if margins are shrinking or if it is getting harder to meet operating costs. In other words, if a business is growing but finds it difficult to cover costs, the business is in trouble. I’ve seen growing businesses go under because sales were good but little attention was paid to rising costs. Some businesses skip key pieces like equipment maintenance or insurance creating a false sense of profitability. Things may not be going as well as you think. If you focus only on sales, you may miss other areas of your business in bad shape. These are hard cases for me because owners are easily deluded by seeing the sales roll in. It is hard to explain why adding cash will not solve the problems. It’s a bit like this. If you are struggling to make ends meet at home, opening a new credit card won’t help. It’s time to raise income or lower costs—hopefully both.
Remember that adding cash to a business adds a partner. In the case of a traditional business loan, the bank will keep a close eye on their money. Skip a payment and you’ll hear from your partner.
Investors want good returns. Few investors will sink money into a business that doesn’t look good on paper. And if you can persuade an investor to put money into your business? They will expect either a piece of ownership or a very good return on their investment. Institution or investor, you’ll pay dearly for that cash infusion.
When should a business look for cash?
A business should seek investment when all systems are maximized. If the business is selling all it can produce at solid margins it should consider looking for cash only if added money will fund added capacity to meet known demand. In other words, if your business is well run and profitable, if your business is selling everything it can produce and profits cannot fund the jump to the next level, look for an investor.
Be honest. You know if your business has problems. If it does, you have to fix those problems. If you can’t, outside money probably will only delay bankruptcy.
The old banking expression has merit. Only borrow money when you don’t need it to survive.
Chris Reich, CEO