Raising capital can be both exhilarating and daunting. As an entrepreneur raising capital for the first time, you may be excited about the prospect of scaling your business but also concerned about pitfalls such as giving away too much equity or falling victim to hidden financing fees. An Outsourced Chief Financial Officer (CFO) can be an invaluable ally in navigating this complex process. Here’s how small business advice from a CFO can help you secure funding for your business while ensuring your interests are protected.
How does a CFO secure business funding?
Whenever helping small businesses raise capital, I focus on adding analytic rigor and professionalism to the fundraising process – especially for business owners new to the capital markets. The three fractional CFO responsibilities in fundraising are:
- Building a pro forma and capital plan
- Evaluating the cost of capital
- Addressing due diligence
Building a Pro Forma and Capital Plan
The first step an outsourced CFO will take is to create a comprehensive pro forma forecast. Your Fractional CFO will work closely with you to gather all necessary financial data and assumptions, challenging your beliefs and pressure-testing the company’s financial resilience. This will help you think through your strategy more thoroughly and ensure the pro forma is realistic.
Remember – the pro forma not only showcases your business’s potential but also instills confidence in investors that your business is well-managed and financially sound.
The pro forma is a base model for developing a capital plan – a key element of your overall business plan that determines how much capital you need to raise and when. Some startup businesses need a single round of funding to grow to profitability, while others raise a series of rounds over many years on the journey to IPO. Your pro forma model will help you determine what path serves your business most effectively.
Evaluating the Cost of Capital
Understanding the pros and cons of business funding options is crucial for a first-time business owner. The two primary types of funding, debt, and equity, each have their subset of options with benefits and drawbacks. For example:
- Preferred equity issuance will invest in the riskiest ventures but comes with equity partners whose interests differ from yours.
- SBA debt is non-dilutive and offers high leverage (up to 90% LTV) but carries higher interest rates and requires extensive due diligence and paperwork.
- Bank debt is inexpensive capital but requires strict adherence to covenants like profitability and cash flow.
- SAFE agreements or convertible debt are very easy to issue up front but create complications in future equity rounds.
- Venture debt, Factoring, and MCAs offer flexible, non-dilutive funding, but often at predatory interest rates (50% APR and higher.)
An outsourced CFO will analyze your business’s financial health, growth potential, and market conditions to recommend the most appropriate small business funding strategy. Their expertise ensures that you choose a funding option that supports long-term success without compromising your control or burdening your business with unmanageable debt.
Supporting the CEO Through Due Diligence
Due diligence is akin to an investor conducting a meticulous inspection before buying a house. They assess every aspect—from the foundation to the rooftop—to ensure no hidden problems. This process can be particularly intimidating for first-time business owners, as it involves a deep dive into your company’s financials, operations, and market position.
A Fractional CFO plays a crucial role in supporting you through due diligence by:
- Preparing Documentation: Most investors will expect financial records prepared in accordance with GAAP, complete with support documents, schedules, and receipts that demonstrate outstanding financial controls and, thus, less risk to their investment. Your CFO should begin these preparations 2-3 months before your fundraising.
- Addressing Questions: Your CFO will be your financial interpreter during investor meetings, translating complex financial jargon into understandable terms and addressing any concerns. This support allows you to focus on the bigger picture and strategic discussions without getting bogged down in technical details, demonstrating to investors that you are backed by a reliable financial expert.
- Negotiating Terms: A CFO helps negotiate the best possible terms for the investment. A CFO’s experience in deal-making can protect you from unfavorable terms and hidden fees, ensuring that the final agreement aligns with your business goals and preserves your interests.
A CFO provides strategic and operational support, making the due diligence process less daunting and more efficient.
Your CFO – a Crucial Partner for Securing Funding
Securing funding is a critical milestone for any business, akin to reaching a pivotal checkpoint on your entrepreneurial journey. Having a skilled Fractional CFO by your side can make the path smoother and more successful. From crafting robust financial plans to choosing the right funding vehicle and guiding you through due diligence, a CFO’s expertise helps you avoid common pitfalls and secure the capital needed to grow your business. This guidance is invaluable for a first-time business owner, offering peace of mind and a clear path to achieving your entrepreneurial dreams.
