How to prepare for raising capital: what to have ready before you ask

To prepare for capital raising, get four things ready before any conversation with a lender or investor: financial statements that reconcile, a forecast with stated assumptions, a specific use for the money, and a data room with your key documents. Then decide which type of capital fits, and check the securities-law rules first.

You may need money for a new location, equipment, a hire, or a gap between payment and payroll. The pitch is the visible part of a raise. The work that decides it happens earlier, and it is mostly numbers and documents you control.

How long does it take to prepare?

Plan on months, not weeks. Statements that do not reconcile, a customer list nobody has summarized, or a forecast built in a hurry all take time to fix, and a rushed preparation shows. Starting early also lets you choose the type of capital instead of taking what is available.

What should your financials look like?

Expect a lender or investor to want statements that agree with each other and with your tax returns. Several years of monthly financials, prepared the same way each period, make the business easy to read. If you run personal or one-time expenses through the company, show an adjusted earnings figure and keep the proof for each adjustment.

Many investors and lenders ask for several years of statements. Some ask for reviewed or audited ones, and that work is done by a licensed CPA firm. Ask the lender or investor what level of statements it expects before you pay for any.

What belongs in your forecast?

A forecast shows whether you understand how your business makes money. Write down the assumptions behind it: customers, prices, costs, hiring, and the timing of cash. A conservative forecast with clear assumptions is easier to defend than an aggressive one with none. Our guide to financial forecasting walks through building one.

How do you describe what the money is for?

Be specific. "Growth" is not a use of funds. "Two sales hires and a delivery truck, ready in six months" is. Write the amount, the purpose, what the money produces, and when, in one sentence, and make sure the forecast reflects it. If you cannot write that sentence, you are not ready to ask.

Which type of capital fits?

The type of capital changes the cost, the control you give up, and who you answer to. A loan must be repaid from cash flow; equity gives up part of the company. The U.S. Small Business Administration lists its main loan programs (7(a), 504, and microloans), which are made through lenders, and each lender sets its own application and requirements. For equity, growth equity explains one common form, and do you really need outside capital and financing options for small businesses compare the choices.

Knowing what each source asks for helps you prepare. Banks, lenders, and investors ask for different things, so build your materials for the one you are likely to use.

What do the securities laws require?

If you sell shares or other ownership interests to raise money, the SEC states that every offer and sale of securities must be registered or fit an exemption, and it lists several, including Regulation D, Regulation Crowdfunding, and Regulation A. Which one applies depends on how much you raise, from whom, and how. Decide which exemption fits your raise before you approach anyone.

Be careful with anyone who offers to raise the money for you, or who wants pay based on how much you raise. The SEC's broker-dealer guide lists soliciting investors, taking part in negotiation, and pay that depends on the outcome of a transaction among the signs a person may need to register. Ask about registration and read closely any agreement that ties pay to how much you raise before you sign it.

What are the common mistakes?

1. Setting a price on the company that you cannot support. Back it with a valuation based on your earnings, not a number you hope for.
2. Messy records. Unorganized contracts, an unclear ownership table, and open operational questions give the other side reasons to slow down or lower the price.
3. A forecast that does not match the use of funds.
4. Approaching people before you know which type of capital you want.

What to do next

1. Reconcile your last three years of monthly financials and list your adjustments with proof.
2. Build a forecast with written assumptions, and tie it to a one-sentence use of funds.
3. Put your contracts, ownership table, and key documents in one folder.
4. Decide whether a loan, equity, or neither fits, using the guides above.
5. Settle which exemption fits your raise and what level of statements your target lender or investor expects, before you talk to either.

To get ready to raise, see how Surfside Capital Advisors helps owners prepare the model, the story, and the data room investors expect. We build the financial model with you, shape the story, organize the data room, and get you ready to raise.