July 17, 2007

Why Ask For a Little Capital, When You Can Get a Lot?

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You would be amazed how often people come to me for help in raising money, and the amounts that they ask for are ridiculously small. In some of these cases, my analysis of the situation shows that with just a little bit of elbow grease, these people could get significantly more money – the type of money they actually need.

Last month, a company came to me desperate for a few hundred thousand dollars. First lesson: when people are desperate for money, the kinds of financing available to them invariably involves "hard money." “Hard money” comes at a great price. Not only is it expensive, but the people who make these kinds of loans take as collateral anything they can get their hands on – including your first born if you were to let them.

I always discourage people from waiting until the last minute to seek funding if such a situation would force them into a “hard money” relationship. Not only are such relationships expensive, but the borrowers also frequently lose whatever collateral they’ve pledged because their ability to keep up with the payment schedules – tough schedules agreed to under considerable duress – leads them to making bad business decisions.

Back to the case that came to me last month: A company needed $500,000, and they needed it quick.

I was quick, too – to point out to the CEO that any money I managed to provide to him would not be “quick” money, because “quick” means “desperate,” and “desperate” always means “hard money.” I told him that if he needed something quick, he needed to go elsewhere. I asked him if he had another place to go for a quick fix. Fortunately, he did, and he was able to obtain some quick money while we worked on his problem.

As I looked into his financial situation – the financial statements and the materials that I’d asked to review – it was clear to me that this was a good company, even though they were losing money. It was, in fact, a company that was soon to be healthy, and the officers had the ability to arrange for a considerable amount of financing – financing far in excess of the amount that they had originally approached me to help them obtain. They had been all over the street looking for ways to solve their short-term capital problem, but no one was able to help them.

I pointed out to the CEO that the company’s facts and circumstances were such that they could probably get as much as $3 million, but to do so, they would have to be patient. And not only would they be able to get many times more money than they originally asked for, but that money would come to them at a cost that would be significantly less on a percentage rate basis than any funds that would come to them under “hard money” circumstances.

I organized their affairs for them in a way that made it possible for them to get the much larger loan. The CEO understood the strategy, and he went along with it. We presented the strategy to a few specialty finance companies capable of understanding this rather complex transaction.

In the end, the company was awarded a substantial line of credit and a favorable interest rate. This accomplished several things for them. First, it enabled them to pay back the “hard money” loan that they’d obtained on an emergency basis. Second, it insulated the company from future cash emergencies. Now if the need for cash arises, they will have a substantial line of credit that they can tap without having to turn to “hard money” again.

Needless to say, the CEO of the company was extremely glad that it worked out this way.

So, if you are an entrepreneur working hard to grow your business, make sure that you match your requests for money to the facts and circumstances of your situation. It’s a shame to ask for a little, when you can get a lot.

About Joel G. Block

Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.

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