Comments on: Growth requires a different kind of capital.

By: Neven Karlovac

Neven Karlovac — Wed, 28 Aug 2013 19:40:01 +0000

Thanks Dave- an important topic.
A comment: in your discussion of receivables-based lending you said “after government billing is deducted”. You are right, in my (somewhat dated) experience lenders were not willing to finance government receivables. After much search I found that Silicon Valley Bank would do it and on reasonable terms and it was a real life-saver for my company.
BTW, there were also outfits that would do factoring (i.e. outright buying receivables) or inventory financing but I found that their terms were unaffordable.

By: Ken Lu

Ken Lu — Tue, 27 Aug 2013 16:27:40 +0000

Great info and comments! Insightful and timely.

By: Tim nguyen

Tim nguyen — Tue, 27 Aug 2013 16:20:06 +0000

Great article. I would like to add… I would suggest staying away from scenarios where you have to pay a finders fee. You will be approached, and/or meet people who claim to have relationships that can open doors and close deals. They may be able to open doors, but its only the lender who can close that deal to their own underwriting guidelines.

We had a situation at a past company using a person who wanted a finders fee. They introduced us to a great bank, and although the APR was high, it was cheaper than other forms of financing. Problem is, once we factored in the finders fee and the adjusted APR simply did not make sense. We would have to have waited a year to honor a non-circumvent to work with that lender.

By: Harry Keller

Harry Keller — Tue, 27 Aug 2013 15:57:12 +0000

Thanks for illuminating exactly how complex start-up financing really is. I have used my savings along with current revenues to finance my company. I’ve also deferred (perhaps to eternity) any salary for me and my partner/wife for the last eight years.

The most important thing to understand is that when you really must have money is when it’s hardest to get. Conversely, when you don’t have to have money is when it’s easiest to get.

For this simple reason, you have to get out your crystal ball and polish it up well. When you’re feeling good about your cash flow and balance sheet is exactly the time to consider financing. Will additional money beyond your revenues be useful or even necessary in the near future — six to twelve months, the time required to obtain the financing?

Can you find other means to finance your business? If you ask your suppliers for a longer payment period, that’s financing. Asking your customers for quicker payment is also a form of financing. Deferring your salary is financing. So is raiding your retirement accounts.

Going to a bank or venture capitalist should be your last resort. Angels are the second-to-the-last resort unless you can find one who really gets your vision and is willing to become involved in helping you far beyond money — in other words, becoming a partner in your venture. Not many do, but finding one is like finding gold.

My business was growing at 50% a year until the recession finally found its way into my industry. Suddenly, we had lots of red ink. I had enough personal reserves to loan the money to my company, lots of money from my perspective. Now, we’re growing again and expect 100% or better growth for the next several years. My loan is safe.

Had I obtained financing or investment during that 50% period, I may have had help with the bad period or may have had to give up control of my company or even had to sell it outright. With an outrageous profit margin, once we cover our fixed expenses, we may be able to self-finance from our growth until we seek to break out of our market niche and realize fully the potential of our patented technology. Hyper-growth almost always requires some sort of financing.

By: Les Spielman

Les Spielman — Tue, 27 Aug 2013 15:53:02 +0000

Very good info Dave. This is extremely helpful and useful. Well done!

Les Spielman