The opportunity of a lifetime has landed at your feet. It will make your company. All those long days and sleepless nights pay off. The people who invested in your dream are winners. Yet, there is one problem. You need to bridge the gap between here and there. You want more equipment or manufacturing space; you need additional installers or programmers; you need more money.
Bridge and gap financing can be beyond the entrepreneur’s reach if there is little collateral, too many debts, or not enough months of profitability. Bankers cannot help you. Investment bankers give blank stares and a lecture on how long it takes to raise money.
Where do you turn? Turn to the people who have a stake in your company.
1 – Call That Stockholders Meeting
Stockholders are especially good sources for loans, particularly reasonably priced bridge or gap financing. Once someone invests in your company, they are the best source of additional money. They know you, your company, and your business.
Current investors are quite likely to make a second investment. You can go to one or all of your investors.
Before you do this, be prepared: know how much you want, exactly what the additional investment buys, and how much you are willing to pay for it. Decide whether you want debt or equity financing. If you decide to offer more equity, determine the fair stock value.
If you decide to get a loan from investors, know whether you want cash or collateral. If you ask for cash, know the interest rate you are willing to pay, how the loan will be repaid and in what time frame. If you decide to get a collateral from investors, called hypothecation of the loan, know what you are willing to give in exchange. Commonly accepted for hypothecation are stock, warrants, options, or a percentage of the loan, such as 2%.
If you are uncomfortable approaching your investors, look at it from their point of view. Do a little research and find out what they want. Savvy investors know that an additional investment, whether debt or equity, is smart money. Making a loan to a company in which you have an investment is the same as investing in your own company. The loan increases the value of the company, and thus the investment.
Investors and business owners alike know that inexpensive money increases profits. When you loan money to yourself (which you are if you are an investor), you receive more interest than paid by a bank. This keeps the interest payments “in the family,” so to speak, while increasing the revenues and profits.
The fact is a smart investor is going to drive a hard bargain. In addition, you may need to inform other investors, and call a board of directors meeting to approve the transaction.
2 – Take Your Stakeholders to Lunch
Stakeholders are a quick source of gap financing. Stakeholders are defined as anyone who has a stake in your company such as clients, customers, suppliers, the landlord, and even your lender. The key to identifying stakeholders is look for anyone who depends on you and your company for some essential part of their business. Often, they are willing to provide a loan in exchange for receiving discounted goods or services, or continuing to receive a required good or service they cannot get elsewhere.
Before approaching stakeholders, find out what is of value to them. Sometimes a stakeholder wants to own part of your company. As you decide whom to approach, consider who could be a joint partner or strategic merger candidate. If you do this, be certain that this is a company that you can rely on.
Your landlord may be in a good position to help you by deferring your rent for a few weeks, with interest, or taking a stake in the company in exchange for free or reduced rent over a period of years. If you are financing significant growth in your company with this loan, your landlord probably will want to lease you more space. That is a point to bargain from.
As you plan your offers to a stakeholder, think about the long-term ramifications. You may risk restricting your company’s growth. If, for example, you have established an exclusive contract to buy parts from a stakeholder who is a supplier, and later you find another supplier provides them for far less cost, you may be stuck with a high-cost item. These considerations must be made before you strike a deal.
3 – Be Like Teddy Roosevelt and Charge
You have the biggest stake in your company. If the money you need is small, say under $5,000, and you need it for a short time, AND can pay off the loan with revenues, use a credit card, or an equity line of credit, if you own your home. The credit card is expensive, expensive, expensive, and the equity line of credit less so, but if you need limited funds with a return far in excess of the money borrowed plus interest, it works.
If you go to other people, the typical reaction of most people approached for small amounts is: “if he doesn’t believe in himself enough to put in $5,000 on a credit card, why should we?”
When you can’t be Teddy Roosevelt, be a teddy bear and go to your extended self: the bank of Mom (or Dad). Other relatives also might help. These people also have a stake in your company, but that stake is you. You need to be extra careful to do the right thing, pay them back with interest, and be quick about it. Be sure to complete loan documents, and set up a regular payment schedule. Your relatives are the most unsophisticated of all investors – even if the work for Merrill Lynch – because they do this for love not money. This is not financial advice per se, it is relationship advice, since holidays can be very uncomfortable if you stiffed the family on a little loan.
It’s the Little Things That are the Hardest
Small amounts of money are the hardest to find. You should do some research before you decide which short-term gap funding method to choose. Know what makes your stockholders and stakeholders sit up and take notice.
Do not fall prey to the stickup method of fundraising: “gimme your money or I’m killing this company.” It does not work: the vinegar of a threat repels.
The honey you should spread is the sweet vision of success. Keep in mind that gap loans are intended to contribute to the long-term profitability of your company. The goal is to increase your company’s worth. The increase may not direct, but if the bridge loan takes you to a place of profitability, stability, and growth, it is worth using.
It is difficult to raise gap funding in any economic climate, so be prepared to know why this gap funding is the best investment money can buy.