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Finance Learning Lab – Micro Course on Small Business Bookkeeping and Finance (Part 10 of 10)

Let’s talk financing! So I think when it comes to financing, a lot of business owners fall into one of two camps. They either fall into the camp where they’re not interested in doing financing and they plan on self-funding. They’re going to bootstrap and fund more and more of their operations by generating more and more sales. So, some go into this immediate blinder without realizing that if you pursued a very beneficial stream of debt or equity funding, you could actually go further faster. And then there’s some businesses that go almost the opposite extreme where they become so deeply focused on raising capital and for some kind of tech and software service companies are going to go really, really deep into the venture capital and angel investors. Or some others in the more traditional brick and mortar business may become obsessed with going to every single lender and inquire about what kind of credit will be extended to them. They get so deeply entrenched in this path that, “I need capital to be able to grow my business”, that it becomes a Catch-22 where they ultimately end up too focused on it and not sufficiently focused on actually growing a customer base, a revenue base and a profitable business now because they’re so hung up on the need to get money to grow further and faster. So your scenario is probably going to depend deeply on where your natural bias is.

I do think most business owners have based on their own personality and their own DNA they’re going to lean to one side or the other side of the spectrum. And it’s really just important to always be looking at how you should open your array of options. So you want to be looking at things not as singular and not as the option of get VC funding or get nothing or get capital or pursue nothing. You want to put yourself in as resourceful of a state as you can and brainstorm an entire buffet of options. You might not like your entire buffet of options. No one said that you’re going to love all of them and it’s a reality that every business owner out there needs and wants more money and there is not going to be the money that everyone wants around there. So you’ve got to get scrappy and resourceful. But just know where your natural bias is and then know and put yourself in the shoes of the person that you’re trying to get something from. What are they going to look at? So if you’re the person that’s not seeking any financing, your biggest risk is going to be opportunity cost. Because you’re actually not knocking on those doors and you’re going down your own path. If you’re the person that’s really trying to get capital, you need to put yourself in the shoes of the person that’s going to give you money, whether that is loan or whether that is equity, and you want to think about what they are going to want to get in return. So if you’re seeking equity, you’re seeking an investor. An investor is typically going to want a 10x return. They’re going to want to have some way of exiting the company. They’re going to want to have some way of getting their money out over some time horizon. So you want to think about if that was the case and if I were to put myself in the shoes of the investor, well what would be the things that I would be looking at? What would be the the metrics? What would be the projections I want to have in there? What would be the valuations that I want to put in place for my company? What would be the items I could put in to mitigate any risk that they may see in their mind? What are the evidence of traction? Because why they want traction is to make sure that whatever that particular traction is, is going to be a good payout in the end.

Similarly, whenever you’re looking more at that debt stream of funding and financing, you’re going to want to look at it again, if you’re someone that’s loaning money what are they going to be worried about? Well they’re going to be worried about not getting their money back at all. And that is slightly different. So where an equity investor wants to make sure they get a 10x, the debt investor is not worried about getting a 10x. They just want to get their own principal back plus whatever that interest is. And so they do tend to be a little bit more concerned with making sure that you have what we call collateral. And so this is why more traditional businesses often tend to go down the root of debt funding because you will have collateral in the form of land, the actual property, the actual building, the actual equipment, and the inventory. Because as the person doing the lending, you get yourself these warm feelings of saying, “You know what, if the business doesn’t work out, I could at least salvage the property and it’s still worth something”. Or they can salvage the land or sell the equipment to someone. So they’re going to be looking for collateral and they’re also going to be looking for indicators of your own credit worthiness. So they’re going to want to say, “If this person has burned anyone in the past well, that’s a decent indicator that they may burn me in the future”. Whereas if this person has a record of being a very strong credit rating, then they’re more likely to be the type of person that is going to withhold their end of a debt agreement in the future meaning to repay their money. So regardless of where on this stream you are, I think it’s important to be aware of your opportunity cost and think more about the person that you’re asking something from. Put yourself in their shoes and ask yourself what they might want. And when you’re preparing your financial projections for them, break them through that particular lens. So my advice to you is if you’ve heard everything that I’ve spoken through today, give it your best shot. Finance Learning Lab does have a YouTube channel with a few other videos that you can watch that will give you a little bit more in-depth on some of these other topics. But give it your best shot to start creating something even if your financial plan is awful and completely off and makes no sense at all. The fact that you’ve put pen to paper, you can build on it and you can make it better over time. You can get input and bring something for something to look at and tweak and refine. But if you never take that initial step of actually dealing with your numbers and bringing people in to help you with your numbers, you’re going to end up drowning on your own.

So I hope that this course and this micro-course has been really helpful for you. If you do end up deciding that you’re looking for some more help with your numbers, I would absolutely love to be one of the the people to be able to help you and guide you along in your business journey. At Finance Learning Lab we offer online courses and live workshops. We do group CFO coaching intentionally where you’re put together in a mastermind group of a very tiny cohort so that we can actually work together and strategize together with other companies at similar stages. Again so you can benefit from the questions that they’re asking and also share and contribute back. It’s a really great way to be able to get access to a CFO without having to spend an outrageous amount of money that would cost for you to hire your own CFO. And we do occasionally do some one-on-one services and some special retreats. So I would absolutely love to keep in touch! Please do reach out to carolyn@financelearninglab.com if ever I can be of assistance and I wish you all the best in your entrepreneurial journey!

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