By Frank Briceño
If you are a small business owner, it’s wise to understand how people and institutions with money or access to money – such as brokers, investors and banks – think and operate. After all, regardless of what life cycle and industry your business is in, chances are that sooner or later you are going to need to tap the well. And we get it, you are busy actually running the company – it is what you do best after all – but taking the time to do your homework on this will place you ahead of most of your competitors and allow you to achieve your personal and business goals.
I’ve been an investor for several years now and have a particular passion for small businesses, so wanted to offer you my two cents on the way we view the world as well as some high-level strategies you could execute to get the funding that you need.
You see, from our perspective, one of the beauties about small and medium-sized business (“SMBs”) is that they are their own universe within the broader economy, meaning that, as mentioned before, there are SMBs that are just getting started and growing quickly as well as SMBs that have been around for decades and are very mature. And while it is true that SMBs tend to be relatively concentrated among blue-collar industries such as trucking and construction, you do also see nearly every industry represented across the SMB spectrum.
So why is this attractive? Because SMBs cater to nearly every investment strategy and goal, so we as investors can pick and choose across life cycles and industries depending on our criteria (we call it “investment thesis”). From your perspective, that’s where it would be beneficial for you as a small business owner to understand an investor’s investment thesis and how these fit with the realities of your company so you can be more targeted in your capital raising efforts.
For instance, if you are looking to sell your company, know that there are plenty of search funds out there that would be eager to buy your company. Are they the best fit to your overall strategy and reason for selling? Depends. If you are what we call an owner-operator (meaning that you own and run your business alone, by and large) you might be better off selling to what we call a strategic buyer (namely, another company in your industry, perhaps a competitor, looking for what we also call inorganic growth, which is basically just growth through acquisitions). If you own what we call a professionally managed company (meaning a company that you own and maybe even run, but regardless, you’ve got outside managers you’ve hired over time that own maybe a small piece of your company or none at all), then a search fund might be the right fit for you.
If you are not looking to sell your entire company, are you open to selling at least a part of it? If so, where in the life cycle is your company and in what industry? If you own a mature company in an established industry, for instance, perhaps you shouldn’t look for a venture capital investment– you should look instead for an income-driven investor or even a lender, such as a bank.
And, on the lending side, if you don’t want to sell any part of your business at all, you could get a loan or a line of credit from a bank or from the Small Business Administration (“SBA”). This could be hard to qualify for, though – you need a good credit score, for one – and takes a relatively long time to get, which as a business owner you might need the money at a moment’s notice. If you qualify for bank/SBA funding and can afford to go through the process, you should absolutely do it. If you can’t, know you are not alone in this and that there are other attractive and helpful alternatives that will still allow you to achieve your goals.
For instance, you could get a cash advance. This is a great alternative that will allow you to build a payment history with a financial institution that you could leverage to get other sorts of financing in the future while giving you the capital you need for your business within the span of maybe a couple of days to a week. Don’t get fooled by the costs associated with it – on the other hand, as you probably know better than I do, the money you invest in your company generates very high returns and cash yields, so if you have a good use for the money, this is an attractive option that could be very beneficial for your business. In that sense, this is where you also need to have good practices in capital budgeting – namely, understanding how much a certain project for your business is going to cost and what returns you expect to get out of it.
Let’s walk through a simple but hopefully illustrative example. Let’s say you are an owner in the transportation industry with one truck making $2,400,000 in annual revenue and you get a cash advance for $100,000 at a 1.4x factor (so you need to pay back $140,000) that you use to buy a second truck. Arguably, your revenue would now be double what it was before – and possibly even more because you could synergize the two trucks that you now have. This would in turn suppose a +1,600% ROI for you in that first year alone. Would you take that deal?
These are just a few among countless other possibilities. When it comes small businesses, the world really is their oyster. And at Progreso Ventures, my investment management and consulting firm, we strive to shuck whatever variety it is you wish to be served. If you’d like to learn more about us, feel welcome to check out our website: https://www.progresoventures.com.
