Money to run a business is a lot harder to come by these days than it used to be. If you get funding, you need to know how to use loan or investment funds wisely. Here are several tips that will help.
Capital (cash, money, dough, moolah) is an asset and like all business assets, it should be used in the most efficient manner – a manner in which it brings solid value to the business (return).
But, capital is a hard asset to acquire these days and thus, should your company be in a position to receive outside financing like a business loan – then that capital should be properly put to use as your business might not have this opportunity again in the near future.
In private equity deals (venture capital, angel capital), most investors will traunch their funds. This means that they will dole out their investment in chunks based on the investee (the growing company) meeting certain milestones in either customer acquisition or revenue generation.
This is done to essentially set up an option for the investor – where the VC or Angel can re-evaluate the deal at certain stages to determine if they want to continue to pour in money or to simply cut their losses.
Now, an option is only valuable when it is in play – take it out of play (like fund the entire amount up front) and the option becomes sunk (worthless).
While this seems to protect the investor, it can also work for a business seeking a business loan.
A business can fundamentally create their own traunch of funds – creating an option for themselves – an option that provides value, such as:
In private equity deals (venture capital, angel capital), most investors will traunch their funds. This means that they will dole out their investment in chunks based on the investee (the growing company) meeting certain milestones in either customer acquisition or revenue generation.
This is done to essentially set up an option for the investor – where the VC or Angel can re-evaluate the deal at certain stages to determine if they want to continue to pour in money or to simply cut their losses.
Now, an option is only valuable when it is in play – take it out of play (like fund the entire amount up front) and the option becomes sunk (worthless).
While this seems to protect the investor, it can also work for a business seeking a business loan.
A business can fundamentally create their own traunch of funds – creating an option for themselves – an option that provides value, such as:
1) Getting Approved:
Allowing the business to request less initially making that request more likely to be funded. While your company may budget that it needs $100,000 in a business loan over the next three years – it does not need all those funds right now. Cut that request up into traunches and get those funds as needed.
This will also show your lender that you can properly manage their business loan and your operations and thus make future requests more palatable.
2) Cut Your Losses:
Measure the results of each traunch. If things are working out as planned, then request the next traunch. If not, scrap the plan and try something else. At least in this case, you will only be on the hook for a smaller amount then the total $100,000 that was planned.
3) Flexibility:
By traunching your funding, you offer your business much more flexibility.
What happens if your business meets its goals with only half the investment (loan) or only after one traunch. If that is all you have had to borrow, you have saved your company large fees and tons of interest over the life of the loan.
Typically, when businesses receive funding they really don’t need or can’t use right away, they tend to manufacture ways in which to spend those funds – ways that might not be in the best interest of the company’s long-term future (kind of like having that money burning a hole in your pocket).
Most business owners panic when they think they need outside money and the common assumption is to get as much as you can at a single time. But, this takes the option value out of the equation and could potentially create more future harm for your business.
You would not go out and purchase 20 brand new computers for just 2 new employees thinking that you will hire an additional 18 employees over the next three years. That would just be inefficient and wasteful.
Thus, why raise more money than your business needs right now?
The goal here is to ensure all your business assets are working overtime to bring in value and profits for your company. If you have too much of a single set of assets, then those assets are not being put to their best use (which is very un-business like).
Make your business loan work for you by treating it as the asset it really is.
