But Steven Enright, a financial planner and investment adviser in River Vale, N.J., warns that such a strategy can be risky for business owners in Montgomery's position. "She has to balance the growth of her company against the potential for getting squeezed out of the business by that growth when she doesn't have the capital to support it," he says. Enright urges her to start paying herself a modest salary, with the goal of directing as much of that money as possible to cleaning up her past credit problems.
"The irony that most people overlook," Enright says, "is that if you've got credit-card bills you can't pay, your debt load is probably growing a good bit faster than your company is--which means it will be tough to ever get out from under it." It's hard to predict how long it should take a business owner to repair past personal-credit problems. (The key variables for any entrepreneur are the size of his or her outstanding debt as well as the monthly paycheck a company can support.) But Montgomery needs to be able to achieve real improvements on the personal, as well as corporate, front with the close of each quarter.
Over the long term, Ratner urges, Montgomery--and entrepreneurs like her--should invest time in seminars that will teach her financial strategies as well as cash-flow and other business-management techniques. "You don't want to wind up in a situation where you grow so fast, and are so unprepared, that you push yourself right out of the box," Ratner says. --Jill Andresky Fraser
Four key rules for raising capital
Whether your company is new or well-established, and your personal financial situation is strong or weak, you'll increase your chances of raising funds if you follow these guidelines:
1. Figure out how much your company will really need the first time around. The worst mistake a business owner can make is to adopt the attitude "I'll take whatever I can get." You inevitably will need more, and you risk losing credibility with lenders and backers when you come back to them with your hand out yet again.
2. Don't try to raise cash without an operating budget, short-term cash-flow projections, and a three- to five-year business plan. If you don't have those documents in place, you'll scare off everyone except your mother and your best friend from kindergarten. In today's financial marketplace the competition for financing is fierce, and only the best prepared will succeed.
3. Make certain your capital structure makes sense from the beginning. This requires discipline. If you borrow money from people, draft promissory notes that clearly spell out how much your company owes, when it will pay, and whose rights are subordinated to others'. If you sell equity, don't give away more than is absolutely necessary, and consider consulting a lawyer about the benefits of setting up different classes of stock. Above all else, make certain that all your early-stage backers understand the ins and outs of their debt or equity positions.
4. If you don't succeed at first, try and try again. Financing prospects can change rapidly for good, fast-growing companies. So do what's necessary to hang on for another 6 to 12 months. Above all, stay in touch with any potential lender or investor who is willing to keep talking. If your cash flow stays healthy, you can hold on.
Heading off future problems
It's remarkable how many problems can develop when a fast-growing company is built around a poorly planned capital structure. That's why Gayle Ehrlich, a partner in the Boston law firm Sullivan & Worcester, advises fledgling entrepreneurs to clean up potential financial difficulties sooner--much sooner--rather than later.
In ASAP's case, Ehrlich objects to the fact that Montgomery has already sold 48% of her company's stock, mainly to a friend who invested $12,000 in start-up funds (twice the amount Montgomery was able to put in by depleting her personal savings). "The problem is, this person may have gotten too much of the company in return for far too little. When you're a start-up entrepreneur, you want to make certain you don't set up a situation where someone stands to reap way too much in benefits from your hard work." What the lawyer suggests is negotiating now--while the company is still young and relatively lacking in value--a price and target date for a buyout of part or all of outstanding stock. Then, when Montgomery's personal-credit picture looks shinier and the company's record is better established, ASAP may be in the position to carry out a more profitable equity-financing deal.
If potential investors still need convincing, here's another Hail Mary play worth considering: "Raise their comfort factor by placing Montgomery's equity in an escrow account, with a clearly spelled out plan for how she can earn it back in incremental stages if she achieves targets in terms of corporate and personal financial results."
