Where is cash when you need it – the art of raising good debt

For some business owners, it is far worse than 2008 when the GFC began. Increasing “For Lease” signs are appearing in the high streets as long term business owners shut the doors because cashflow and access to cash from the usual sources, is grinding to a halt. The news is pretty grim on a daily basis with even the big brands affected. We’re watching household names call it quits or be forced to re-emerge and morph into new entities. On the flip side, the set-up of online businesses is booming and many business owners are closing the doors on the old ways to make money via new methods. There are business people out there (of a wide range of ages) taking advantage of the digital economy and our increasing online buying habits. Dale McCarthy, founder of Sydney based venture capital company, Foundry says “There is a boom in digital start-ups at the moment. We are being inundated with approaches for capital from entrepreneurs who have started up disruptive digital businesses. These business owners are smart, fast thinking and see the opportunity to create new business models online, using low-cost methodologies.”

Sure start up’s need funding but established businesses may also need to raise funds during their lifetime on more than one occasion. So when do you borrow cash? And when do you call it quits? And if you borrow, where, how, from whom and what do you borrow?

Why would you raise funds? The reasons are varied, you may need to:

• Hire new people, buy new equipment

• Grow the company with an increased sales and marketing investment

• Gain more working capital

• Enhance your credit or borrowing status

• Launch new products

• Fund acquisitions

• Retire debt and clean your balance sheet

• Replace shareholders

The reasons are many, but you need to be clear on why you need the funds

Then you need to get investor ready? So you can make it easy for investors to make the decision to invest in you

• If you want to borrow cash, you have to be able to describe what you want the money for on the back of an envelope

• Then give the investor all they need to make an informed decision about lending you the money – eg you need to be able to answer

o What does the company do?

o How does it make money?

o How much you want?

o Who is running the company?

o What IP do you own – is it protected?

• You will need to plan the investors exit – eg what will the investor get out of the investment and when will they exit the loan?

Where can you find money from in this tighter economy? The myth is money is difficult to come by, but there is money out there – IF you have a decent proposition.

• The banks will still lend if you give them a good enough case

• Angel investors are on the lookout for new opportunities and will look ruthlessly at the return you can provide them

• Venture cap funds will also want a solid exit plan and to know the estimated return up front

• Family and friends are sometimes the easiest but the most potentially complex source of capital – proceed with caution, but it IS an option

• Government grants are available but you can’t get the money if you don’t research and apply!

Good debt v bad debt

There is a misconception that any type of debt is bad debt. But when used correctly, loans and debts are a viable and necessary option to grow and sustain your business. Knowing the difference between good and bad debt is important. Good debt is about loans that create wealth for you e.g. buying assets. Bad debt is debt that doesn’t make you money or build you an asset base. Sometimes you need to get involved in both!

So to summarise my tips for borrowing

1. The first thing to decide is why you want the funds — be really clear. Not much point throwing good money after bad

2. Then decide where will you source the cash from and when and how will you and your investor exit the loan

3. The priority then is to get “investor ready” to put yourself in the best position to successfully obtain the funds

Good luck. There are opportunities out there.

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