If small businesses try to secure capital every time they go through different stages of growth, they will dilute their equity to the point that they have almost nothing left.
New York, NY (PRWEB) June 05, 2013
Many aspiring entrepreneurs are misled into pursuing a capital investment without taking into account financing, which is the key component that gives a company its ability to grow. MJ Gottlieb from N2ITIV Solutions, a blog for entrepreneurs and start-ups believes that, while all entrepreneurs need a financing component whether they are product or service driven, there is no debate that, if they are a product driven company, financing is mandatory.
Gottlieb uses his latest post, Using Capital The Wrong Way-My Painful Story to explain one of the most common misconceptions entrepreneurs have understanding the difference between capital and financing, and one of the biggest lessons in what not to do in business.
Gottlieb believes that capital is most beneficial for start-ups, as it gives a company the ability to show proof of concept by allowing a product or service to get off the ground and be brought to market.
Gottlieb adds, “The problem, however, lies in the growth phase as if small businesses try to secure capital every time they go through different stages of growth, they will dilute their equity to the point that they have almost nothing left."
"Financing, on the other hand, allows a company to grow by allocating a percent of revenue to financing growth." Gottlieb adds, “This way, a company can hold on to their equity and still grow as big as they want to, provided that they pick a financing entity that is sizable enough.”
Gottlieb is quick to point out that there is, however, a big difference between what happens to normal businesses with controllable growth compared to what is read in the newspapers about the ‘Phenoms’ out there, many of them in the tech industry, who actually do need a series of rounds of capital to keep up with their growth.
Financing is necessary because a company rarely has the cash to match their receivables with their payables, and unless the company has capital reserves to draw off of their capital they will need financing to stay above water. This is one of the most common business mistakes entrepreneurs make. Gottlieb adds that the best place to get financing is through a company that is in the same business as it is a much lower risk, so the interest rates will be dramatically lower than going the conventional route of banks and institutions.
Gottlieb adds that in his opinion, the best option of all are strategic alliances and partnerships. This is where companies go to similar companies in their industry who are already doing what they are doing and have of all the resources and infrastructure they need in place. Strategic partnerships (alliances) kill two birds with one stone as the company will normally get both the investment (capital) and financing all under one roof. Furthermore, being they already have the infrastructure in place, their outlay of capital will be a fraction of what a company would need compared to going to investors outside of their industry with no resources in place.
N2ITIV Solutions, founded by MJ Gottlieb and Gary O'Neil, is a strategic consulting firm specializing in the implementation of creative business strategies to help aspiring entrepreneurs and small businesses increase their brand awareness and monetize their businesses. The N2ITIV website is an entrepreneur and start-up blog offering advice learned through Gottlieb and O’Neil’s experience owning and operating five companies over the last 21 years.