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The Difference Between Capital And Financing

| 12.31.2014 |

Many startup entrepreneurs are excited when they finally receive the investment they have been working so hard to secure. They do whatever they do with the money they received, everything goes according to plan, and then the unthinkable happens - they get a really, really big order!

 

Celebration time? Not so fast…

 

The difference between capital and financing is one of the least understood concepts to the startup entrepreneur and happens to be one of the most important things every startup entrepreneur needs to grasp in order to give any chance for his or her business to succeed. I know this first hand.

When I had my first business, I landed my first national account for a 10-store test in Colorado, which happened to be where my partner and I were going to school, so a lot of people knew us. Needless to say, the product sold out and we received a 200 store re-order. We were so excited, until we realized we didn’t have the money to pay the suppliers to fulfill the order.

 

For the next several weeks, we ran around like chickens with our heads cut off trying to borrow, beg, and steal (well, not steal) in order to fulfill the order. We finally managed to get the money, rushed the production, and made the delivery to the customer.

 

This happened again and again until we simply couldn’t find anyone else to borrow money. Investors were willing to give us money, but the more money we asked for, the more equity they wanted. It was a nightmare.

 

So here’s the lesson:When you are looking to raise money for your company from an investor, you normally create what is called a “use of proceeds,” which is a list of items of what you need to get your company off the ground or to the next level. You need “X” amount of dollars for “Y” percent of the company.

 

Should you run out of that money and need more, you will give more equity for the next sum of money, and then more and more - until you hardly own a thing.

 

The solution: Financing. Financing is the magic sauce that gives your company the ability to grow whether you ship $50 or $50,000,000. If you are a product driven business that needs physical inventory to grow, financing is mandatory.

 

There are a few ways to secure financing. One way is to get it from banks, factors, and other financial institutions, which charge you interest on the amount they lend you. This is very difficult when starting out as you will always need cash at the very time when the bank, factor and/or financial institution is not willing to give it. You most likely will not have any collateral, so your company is at the mercy of a third party.

 

For example, factors are typically lending institutions (or banks) that provide accounts receivable financing on your orders. The only problem with that is you only get money from them after you ship to the account, so you are stuck needing the money to pay for the product first… which you simply won’t have if you continue to grow and consistently need more inventory.

 

Every company in my opinion needs capital as well as financing if they truly want to scale the business. The best way to do this is not to find an investor but rather a strategic partner who will give you the opportunity to grow your business, without taking additional equity away from you every time they lend you money.

 

I know of very few companies on this planet who have truly scaled to worldwide brand status who hasn’t had the backing of a strategic partner who was there to provide an additional capital infusion when they needed it as well as continuous financing for vertical growth. Many companies look like they did it all on their own, as many strategic partners are often silent and never mentioned (nor do they need or want to be). The truth is, 99% of the time there is a strategic partner behind the scenes putting fuel in the company’s engine to keep it running.

 

My strong recommendation is if you need some startup money, get some "friends and family money" to get you out of the starting gate, however, when you are looking to truly scale your business, don’t look for investors, but rather look for a strategic partner who is in the same (or similar) market, and has the resources in place to help you in all aspects of your business, as well as the piggy bank to finance your growth.

 

You may think you just need 50k to get your company off the ground. Trust me, you will need more. If, on the other hand, you raise a bunch of cash in exchange for significant equity, you will no longer have the equity available to give when that perfect strategic partner comes along.

 

Good luck in your pursuits, stay hungry and hustle hard!

 

M.J. Gottlieb is a serial entrepreneur, having owned and operated six businesses over the last 23 years. He is currently the co-owner of Hustle Branding, (a division of The N2ITIV Group, Inc.), a strategic consulting firm specializing in the implementation of creative business strategies to help aspiring entrepreneurs and small businesses increase their brand awareness and monetize their business. He is also the author of How to Ruin a Business Without Really Trying, released by Morgan James Publishing.