Every business can always use more cash. Ideally, that cash will come from profits, but there will be times when you need to turn to financing routes to increase your available capital. Taking on debt or new investors can spur your company to greater growth and stability, but it also comes with downsides.
Interest payments on debt decrease your long-term cash flows, and too much debt can put you at risk of bankruptcy. Selling equity in your company decreases your own cut of the profits and potentially lessens your control over strategic decisions. Obviously it's advisable, if not easy, to formulate and distribute a minimal viable product as soon as possible, without having to delve too deeply into the search for venture capital. While some companies are that lucky (or their product is that amazing), most companies need to find more investment at some point. Here are some times when you know the benefits to raising capital will outweigh the costs.
When You Can Invest In Growth Opportunities
This is probably the number one reason businesses raise capital. You have an exciting growth opportunity, but you need more money to pursue it. Maybe you want to expand your successful local business to a regional or national scale and you need cash to open new locations, hire new people, and advertise in new markets. Maybe it's a new app that you need money to develop and get onto the App store as quickly as feasible.
Whatever the case may be, make sure to do your due diligence beforehand. Does the potential growth in cash flow outweigh the cost of raising capital? What's the downside if your growth initiative fails? If raising more capital will give you the resources to grow your company without jeopardizing its stability, then it is probably worth the cost.
When The Price Is Right
Equity valuations and interest rates are prone to significant swings. It might be possible to get $100 thousand for 5 percent of your company one year and have to give up 10 percent the next for the same amount of capital. The interest rate for the same amount of debt could also double from year to year if the credit environment tightens up.
You should never raise more capital just to take advantage of low costs, but it absolutely deserves to be a factor in your decision. Interest rates today are still near historic lows, and venture capital funds are investing heavily, driving up equity valuation. If you're a small business owner, now could be an opportune time to raise more cash for your company.
When Your Capital Structure Is Suboptimal
Equity and debt financing have different advantages and disadvantages. Debt is cheaper than equity, but decreases cash flow and flexibility. Equity gives you the freedom to invest heavily in growth opportunities, but it also gives other people some ownership control of your company.
Sometimes, you might find that your company's mix of debt and equity is not ideal for your current priorities. If, for instance, your company is stable and highly profitable, it might make sense to take on debt to buy out some of your investors, securing more of those future cash flows for yourself.
On the other hand, your company might be getting crushed under the weight of its debt. If you're barely able to cover interest payments on a regular basis, it might make sense to sell some equity and pay down that debt.
When You Need To Buy Time
Few businesses are profitable right away. Almost any company is going to operate at a loss for the first year or two, and some will lose money for much longer before making money. Ideally, your initial capital should cover this period, but sometimes that's not the case. A bridge loan, or a secondary investor, can give you enough money to keep operating until your business is profitable.
However, if your company is taking longer to reach profitability than expected, it might be worth examining whether it's a feasible business in the first place. Make sure you know why you're not profitable yet, and what it's going to take to get into the black. Otherwise, raising new capital is just going to allow you to dig your business a deeper grave.
When You Need Some Help
Sometimes, the cash isn't even the biggest asset that a new investor can bring to the table. Many venture capitalists will have a wealth of experience in your industry and plenty of valuable advice for your young company. If you find yourself in over your head, it might make sense to seek out investors who can help guide you through the many complexities that running a company entails.
Consider the assistance a new investor can give on top of their monetary investment. An investor who's willing to actively assist you with problems you might not be equipped to deal with is more valuable than one who offers more money but no help.