Raising Capital: 4 Benefits from Owning your Weakness

Posted on: July 9th, 2019

raising capital for business

Capital raising is a massive information exchange with suppliers and consumers of information. The borrower is the supplier and the lender is the consumer. Often the reality of your business does not perfectly align with the perception you wish to create. You may lack management depth, or have inferior financial reporting processes. Every company has a weakness, regardless how profitable or brilliantly managed it is.

When presenting your information, it is always a good idea to make sure it is organized and properly framed, so it can be absorbed all the more easily by the consumer. Lenders do not respond well to things they cannot understand. They often see straight through bluster and hyperbole. Creating a strong presentation framework can be the difference between raising capital and not raising capital. There is always a positive return to frameworks and organization in your information presentation, be it more enthusiasm for the deal, lower pricing or a higher loan amount. Part of your communication gestalt involves presenting complicated issues in a mature and balanced light. Lender’s need clarity and relatability in your confidential memorandum. They need objective, detached logic, not personalized, subjective insights.

Above all, your information framework needs to educate the lender, so they can easily identify your business model, and potential risks. Part of getting through lender diligence involves earning the trust of the lender. Lenders want the comfort of knowing you have mature judgement, that you have awareness of where you’re strong and where improvement is needed. Discussing where you can improve during the capital raising process is a great way to build a positive impression with your lender. It differentiates you as straight shooter and allows you to shape the story to your advantage. Here are 4 benefits to owning your own weakness in the capital raising process.

Mitigates Deal Risk – getting a sensitive areas out of the way early is always the best way to proceed. It allows you to move forward with your deal process, with a clear path to a closing. Having a sensitive area discovered late in the diligence process, will likely kill your deal.
Establishes your power and credibility in the lending process – people that disclose early and maturely are people you can trust. When you disclose early, the other party relies on you to shape and solve the issue, putting you in a position of power.
Mitigates Lender Digging for other inane issues – when you serve up an issue you can solve, you’ve presented a downside risk to lender on a silver platter. This makes it less likely the lender will continue to dig for other risks in the deal.
Increases relationship trust – lenders want to work with business people that are honest and don’t hide things. When they trust you, they are more likely to buy into your growth vision and execution plan.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.