Raising capital for your company can be challenging enough during times of expansion and when funds seem to flow freely. How can you get the funding you need to keep your business operational during a downturn or recession? While raising capital can be more of a challenge during financially difficult times, your business does have options when it comes to getting the funding it needs to survive and thrive.
Be Flexible About Business Valuation
How much you believe your business to be worth and how much an investor believes it to be worth are often two different things. The higher your business’ value, the larger the ownership in it you retain when you bring on investors. But if your business is valued at a lower amount, your ownership stake becomes diluted. An investor contributing $50,000 to a company valued at $2 million will be purchasing a 2.5% ownership stake. But if that same company is suddenly valued at $1 million, the investor’s ownership stake doubles, to 5%.
During times of expansion, it’s in your best interest to push your business’ value up as high as possible. But if you want to raise capital during a recession, you may have to accept a lower value and ownership dilution. During the last two recessions, the average company saw a drop in valuation of around 13% (2008-2009) and 32% (2000-2001).
Connect With Your Existing Investors
If you haven’t already, reach out to investors who already have a stake in your company to see if they would be willing to contribute more at this point in time. Your company’s existing investors have a stake in the game — they want your company to continue to survive as much as you do, otherwise, they will lose their investment. Your existing investors may be more likely to provide more funding to your company during a downturn than they would be to invest in new, unproven businesses.
If you can’t get investor financing during a recession, debt financing might be an option for you. Before you decide to take out a loan for your business, think about how you will use the loan. Will get the financing help you expand into a new market or develop a new product? Do you need the loan to continue to pay your employees?
In the wake of the COVID-19 pandemic, government stimulus bills have introduced business loan programs that your company might be eligible for. One of the programs, the Paycheck Protection Program, is designed to provide funds to companies to help them keep employees on the payroll. The loans are forgivable, provided certain conditions are met.
Consider a Business Pivot
Another way to raise capital during a recession is to find a way to make your business in-demand. Getting creative and pivoting your business can mean the difference between thriving and going under during a challenging time. One way to quickly pivot your company and keep capital coming in is to find a way to bring things online or to go digital if you have yet to do so. For example, if you operate a brick-and-mortar store that has had to close, see if you can start offering online ordering and shipping or curbside pickup. If you run an educational center, see if you can begin offering programs over a video conferencing system, rather than in-person.
Another option is to pivot to where the need is. What products can you begin to offer that people need most during the current recession? As a result of COVID-19, some clothing companies started to offer cloth, non-medical grade face masks while some liquor companies began to produce hand sanitizer.
Look to Cut Costs
Along with raising capital during a recession, it’s useful to find a way to trim your business’ expenses, so that the capital you bring can go further. Now is the time to cut aspects of your business that might not be as profitable as others or to shift your attention away from side projects and to focus on the areas that remain viable. You may need to scale back on marketing and advertising and focus on getting through the recession intact, before shifting your focus back to growth again.
Whether in the midst of a recession or during times of economic growth, New Direction Capital can help you find the best ways to raise capital and can help you find the best mix of capital for your business’ needs. To learn more about how our virtual CFOs can help your company carry on in the middle of challenging economic times, contact us today.