“Trust but Verify” – 10 Ways to Earn Financial Credibility With Lenders

The clock is?ticking. Your window of opportunity to dominate your niche, and raise capital, is closing all the time.???Let me help you beat the funding clock.

I’ve been a VIP speaker for Credibility Nation this week, speaking on “financial credibility”?so I thought I’d pass on to you some of the secrets that I’ve been disclosing there.??If you want to attend the rest of the sessions, click here.

You already have heard a great deal from me about obtaining dilutive capital?(i.e. selling stock, a convertible note, or a SAFE agreement) from investors. (Dilutive capital means that you will have to distribute stock to the investors, either now or in the future, thus diluting your share.)?By contrast, non-dilutive capital can take various forms, for example:

• Loans from private individuals
• Factoring from factoring companies and individuals
• Secured bank and finance company loans (working capital)
• Unsecured bank and finance company loans
• SBA loans (and similar government loans in other countries, to encourage small business development)
• Grants intended to support for-profit businesses engaged in technology development (such as SBIR grants in the U.S.)
• Reimbursable grants from private foundations to support for-profit impact-driven businesses (“Program Related Investments”)
• Donations to an affiliated non-profit
• Extended credit from vendors and suppliers
• Advance payment by clients (such as paying for a year of service in advance)
• Royalty financing (paying an investor back as a percentage of revenue over a period of time
• Licensing fees from other companies to use your Intellectual Property
• Territory-ownership fees (to allow individuals or companies to control sales of your product in a geographic territory or vertical market)
• Franchise fees
• Charging for services that you now give away for free, such as technical support above a minimum

I could write a book about this; in fact, I have written a book on “royalty finance” (aka revenue royalties or revenue participation) called The Road Less Traveled, available on the https://intelliversity.org website.

There are other forms as well; this is a partial list.?You can get highly creative in generating non-dilutive financing.?This is one of the most enjoyable jobs I do day-to-day in my consulting practice as fraction-CFO, and which I train you to do when you participate in?Intelliversity training programs.??Make an appointment with me at https://intelliversity.org/connect?for a non-charged educational consultation to discover what you may have overlooked, while you still have time.

In the meantime,?take a good look through the above list and ask yourself, how can I generate each one of these forms of financing. As CEO and Vision Master, this is a primary responsibility, in order to keep your company flush with cash.?Rule number 1 in business:?never run out of cash.?You will always have to answer the question:??which method of raising cash is better for you and your company:?dilutive or non-dilutive financing, assuming you can get either one.?The most general answer is that a balance between both forms of financing is optimal.?So taker a serious look at this list and call me for help in finding fresh opportunities for non-dilutive financing in your company.?I’d enjoy it and so will you.

As an example, one of my Vision Master students called me?with good news today that a large bank with a venture-capital arm offered her a $1.0 to $1.5M convertible debt financing, to fund immediately.?Little due diligence was needed because they had already done their due diligence as part of a prior non-dilutive (debt) financing.?Although the convertible debt offered is considered “dilutive” because it can be converted to stock in the future, the cap on valuation is so high that the dilution will be minimal, so she will take the offer seriously in lieu of further interest-bearing non-dilutive financing.

What’s important to understand here?is that she was eligible for this type of financing because of the work she had done earlier in establishing financial credibility.

Here are ten steps she took to establish financial credibility:

1. Making sure that basic gaps?in corporate governance and financial controls were closed
2. Bringing on an Execution Master?with long-time corporate experience to manage the revenue-generating side of the business
3. Completing a training program?(through Intelliversity) on establishing trust with investors (forgive the self-promotion here)
4. Making sure her financial proforma was error-free, professional-looking, and matched past income and expense numbers
5. Separating long-term amortized development expenses from operating expenses, so the bankers could clearly see that the company is profitable (using EBITDA as the measure of profits)?on a month-to-month basis.
6. Invoicing clients for every billable expense, by setting and meeting high rations of hours worked / hours recorded and hours recorded / hours billed.
7. Controlling expenses in every conceivable way,?so that the bankers could see that the company is competently managed.
8. Reducing accounts receivable?through high-level discussions with clients.
9. Paying attention to financial ratios?on a weekly basis as part of her KPI’s (Key Performance Indicators)
10. Developing personal habits?of paying close attention daily to cash flow.

All these activities in establishing financial credibility?will be helpful in obtaining dilutive (investor) financing later, and they are essential now to obtain bank financing.?Let me just emphasize one point above all else:?she worked hard to ensure that her company shows a positive EBITDA each month.

EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization.?In her case, she did this by putting long-term software development expenses BELOW the line (as amortized expenses).?For tax purposes, she may be able to expense these in the current year, but for banking purposes, these expenses are not considered part of the company’s expenses.?This left EBITDA as positive each month.

In other words, the company is “default alive.”??If necessary, she could delay further software development and survive in the default condition – namely, making money with the product they have now.?A default-alive company has much higher financial credibility than the alternative.

Key Take-Aways

1. Balance?dilutive and non-dilutive financing.
2. Know?the benefits and costs of each.
3. Explore?the many forms of non-dilutive financing and get creative.
4. Work hard?to establish financial credibility
5. One key measure?of financial credibility is whether your company is “default-alive” – i.e. it doesn’t need more financing to survive (other than working capital to buy inventory and to balance AR and AP)
6. One way to demonstrate status as “default-alive” is to put development expenses below the EBITDA line.

To learn more about these methods of financial credibility and non-dilutive financing, feel free to?make an appointment with me here.

This article first appeared on the Intelliversity website on December 8, 2021 .