My entrepreneur clients often ask me how to raise capital. My first response is the same response I give entrepreneurs when they ask me to help them issue stock to an employee: Do you really need to?
Just like I advise business owners to not issue equity to an employee unless absolutely necessary, I advise business owners not to take on investors unless absolutely necessary.
Why? You tend to make better decisions when you have a tight budget. The “extra” money you get from an investor tends to lead to sloppy decision making. “Oh just buy it, we can afford it” verses – “do we really need that, is there a better and less expensive way to do that?”
There may be a time you have to get capital. In that case, try to make it a loan rather than give up equity in your business. And make the payments amortized, rather than interest only with a balloon payment. The future may be bright and a balloon payment in 5 years may seem easy, but 5 years can go by fast without a significant uptick in revenues. If you can’t afford an amortized loan (interest and principal in each payment), then maybe you can’t afford the loan. And maybe – you don’t need the loan or capital because there are other more creative solutions you haven’t discovered yet.