When it comes to money and financing, there are some rules that seem like no-brainers: working to become the next VC unicorn = good; getting into debt = bad. Well, like most things in life, rules aren’t always hard and fast. It depends on the business and the situation, of course, but sometimes the best course of action for financing your business might be the opposite of what you originally thought. Here are four surprising things you should know when you are seeking financing.
1. Raising less money at a lower valuation early on can be a good thing.
It’s exciting and validating to get a large investment and a high valuation, but after the initial thrill, it could set you on a difficult trajectory. For one thing, VCs expect valuation increases of 3-7x between rounds. That’s a high bar for even top-performing companies, especially if there is a market correction. It can also reduce your exit options, since the higher valuation narrows the number of buyers. So raising only what you need, at a lower valuation in the beginning, may actually be a better move.
2. The best time to ask for money is when you don’t need it.
Say things are going well and you have the capital you need for right now and the foreseeable future. That means you can wait until you need funds to seek out financing options, right? Playing the waiting game may limit your options, and, with a ticking clock, you may have to choose a solution that’s not the best for your business because you need the money. Thinking ahead about potential financing needs before you require it gives you the time to explore all your options and make the best decision without pressure.
3. Taking on debt can be a good thing.
Debt may conjure up bad memories of opening too many credit cards as a young adult, but debt for a business is a whole different story—debt is not a four-letter word! Debt can be a great supplement or even the sole source of capital to grow your business. It allows you to secure funds based on your inventory or even your intellectual property (like your name and logo) or your e-commerce revenue. Debt can be more flexible, and I liken it to dating vs. marriage: it’s much easier to untangle. The biggest benefit for founders is that it allows you to hold on to more of your equity, which means a bigger payday in the long run.
4. Getting financing is more than just money.
Sure, working with a lender or VC can provide you the cash you need to fuel the growth of your company. But there’s a lot more the company you choose to work with can provide. They are (literally) invested in your success, and they are expert advisors who will work with you every step of the way, provide counsel, help you work through potential issues and make connections for you. It’s something to think about when choosing a partner, and something to take full advantage of once you have secured financing.
There’s no one-size-fits-all solution when it comes to financing, and there are different options or combinations that could be right for your business. Keep an open mind, be flexible and think through the positives and negatives of each solution before you secure financing. The answer may surprise you.
Jennifer Palmer is CEO of Gerber Finance, the leading Asset Based Lender for fast-growing brands, with a specialty in natural products through its Naturally Gerber division.