How To Know If You’re Ready For A Capital Raise

For a small or medium-sized business, determining whether it’s the right time for a capital raise can be complex as owners weigh many seemingly competing factors: What is the company’s projected growth? What changes are coming? How does the economy look? Are there any global events that might influence backers’ willingness to fund their company?

Timing, of course, is a subjective question. A trend we’ve seen with a lot of our clients is that they have specific opportunities or ventures—medium- or long-term strategies they want to undertake. However, they get caught up in the day-to-day, and they're not necessarily aware of all their options. And planning for a big capital raise tends to get kicked down the road.

 We think these leaders should change their mindset. If they envisioned having a certain amount of capital available—from equity dilution, long-term partners, or some other backer—then what opportunities would be available? How would they be able to grow their businesses and their revenue?

A Matter Of Timing

Of course, it’s not always the right time for a raise. Red flags might include short-term struggles within the company that pose a distraction, such as managerial turnover, restructuring, or structured layoffs. Significant loss of revenue or key clients would also be an issue. And, sometimes, current events can impact businesses in particular industries in adverse ways.

If you're going into equity REITs, you need to have time available to procure all the documents and the data required for any kind of due diligence, which is quite an onerous process. If your ducks aren’t in a row before beginning this process, it can lead to wasted time and lost opportunities.

Potential Green Lights

But what signs indicate a more auspicious time for a company to successfully navigate a major capital raise? Here are a few:

• Sudden new growth opportunities.

• Entering a busy period with some kind of event or cycle that requires additional inventory, staffing or equipment.

• An opportunity to immediately create value—buying out a partner or an additional opening in a new location.

• An opportunity for growth that presents itself in the short term.

One caveat: The current market environment is not ideal for raising equity because risk-free rates and interest rates are so high that you have to tack on a significant discount onto a good investment to make up for the parity. This is an issue with the macro environment right now. However, if you could delay equity specifically, then I would recommend considering other signs that it's a good time to take a capital injection, focusing on any kind of opportunity. 

Paving The Way For Future Growth

Ultimately, you should ask yourself these questions: What is that one thing you’ve always wanted to do with your business? What is the change you want to implement? What would the result be? How would your business benefit? And, what would it cost—can you afford it, or do you need more capital to make it a reality? 

Smart companies don’t raise capital simply to have more money in their coffers, or worse, only when they’re in trouble financially. Rather, undertaking a capital raise is a strategic step towards actualizing a long-term vision and supporting profitable growth.