If you’ve ever been shopping with a 7 year old in tow, you know they “want” everything that catches their eye. But Dad and Mom know what the child “needs” is to replace the shoes they’ve outgrown.
This assessment of Want vs. Need is a philosophy more business owners should embrace when looking for capital.
Entrepreneurs are heavily vested in their businesses. They start their company knowing they will succeed. Consequently they believe that any bank, investor, or venture capitalist will share their vision and agree to provide the capital they want. Unfortunately, that’s not what happens. In painfully few cases is the business owner able to secure the desired funds.
But the reality of the situation goes even deeper. First time entrepreneurs have a tendency to do one of two things when it comes to determining the volume of funds to ask for.
They ask for more than they need
They ask for less than they need
Either can lead to disappointment and frustration.
If you ask for more than you need, your investor or banker will question your intended use of funds. The probability is that you will be turned down.
If you ask for too little, your investor or banker will question your knowledge of the business and see you as an extremely risky venture.
The bottom line is that before asking for funds you should do your homework and determine exactly “what you need.”
Having done that, the next critical step is to determine where you might be able to acquire the needed (not wanted) capital. Here’s where another dose of self-honesty is important. You may “want” to get funding from a bank or private investor. However you may not currently meet the lending/investing criteria that would qualify you for funding. Things like age of the business, personal and commercial credit score, historical profitability, cash flow analysis and a host of other items could easily derail any hope of getting capital from a bank, venture capitalist or angel investor.
What you “need” is to identify a source of funds that is accessible to you given your current situation. Invoice Factoring or Merchant Cash Advances may be some of the few avenues open to you. Yes, the cost of money may be slightly higher, but the fact is you can’t always get what you want.
Here’s an analogy: On March 27th the average price of a gallon of gasoline in Los Angeles was $4.05. The price in Dallas was $3.48. If you were visiting LA from Dallas you’d pay the LA price. Your current situation would not allow you to pay the Dallas price – even though that might be what you want. But what you “need” is to fill up the tank. This, however, is a temporary situation. When you get home, things will be different.
Your financing options and cost of money should be looked at in the same way. Do what you are able to do right now. As your company evolves and grows other opportunities will become available. Part of being able to see things from this perspective is to understand that Invoice Factoring and Bank Lending are not the same. They are in the same Class but are not the same Species. [The same way elephants and hippos are of the same biological class but completely different species.] Therefore attempting to apply the rules, processes and pricing models of one to the other will result in confusion and frustration. [If you’re looking for a hippo but are currently in India, you’re out of luck. There are no hippos in India. But there are elephants.]