CHAPTER 2 Why You Should Get the Maximum Possible
Try to get the maximum amount of capital available regardless of the amount of capital you think you need. There are many reasons why this is a great idea, but I will mention a few. One primary reason it is a great idea to always accept the maximum number you approved for is because it looks better on your credit when you do not use anywhere near your maximum limit. It is better to get more than you need and still not use what you don’t need to use, but at least you know that it is available. There is a term called credit utilization ratio. It basically looks at how close to the maximum limit you are using. Consequently, if you get more funding than needed and not go near the limit, it will be beneficial in terms of giving you an acceptable credit utilization ratio.
Many people may argue that credit utilization ratio is something that is significantly more important for personal loans than business loans. However, most small business owners understand that almost all lending institutions require personal guarantees, where personal credit and personal taxes are also reviewed in addition to the corporation’s financials for funding decisions. Another point to consider is the one of many stories people have heard where someone was originally approved for a certain amount but decided to take less than that amount, and when they realized that they needed more the bank would no longer approve the original amount. In a perfect world we would always be 100 percent accurate on the full extent of capital needed without anyone causing delays or problems that can influence the amount of capital needed. However, since we do not live in a perfect world, there is a chance that we could find ourselves in a situation where we need more capital than anticipated, which is why I advocate choosing the better of two imperfect situations. As a result, it is better to have the capital and not need to use all of it, than need capital and not have it.
Although most of the previous paragraphs addressed businesses that are more seasoned that also happen to be in a good financial situation considering debt funding and says very little on equity funding, I also wanted to make sure that I address as wide a group as possible. So I will now also address some of the newer businesses that may not be as seasoned in their industry that may even be considering equity financing since it may be too early to be considered for debt funding. This principle of getting the maximum amount of funding in terms of equity should not be sought by any means. There are many situations where the cost of getting the maximum amount of equity funding outweigh the benefit of seeking it. However, I may mention a few things that makes getting the maximum amount of funding beneficial to the new business whose financial situation is not as well placed in the early years. This principle is also applicable when referring to seed money that can be given through VCs to startups. The next several paragraphs will address the benefit of taking the maximum amount of funding that is more geared toward equity versus debt. However, as mentioned earlier I am of the belief that getting the maximum amount of funding even in debt gives the business owner the most amount of flexibility and leverage to face the unexpected challenges that may arise out of their business.
Numerous startup entrepreneurs often face a dilemma when deciding on the amount of seed funding required to kick start their intellectual property. There exist conflicting opinions regarding this vital issue, some advocating for one to go for a relatively lesser seed funding amount than they actually need. Others are of the opinion that accepting the maximum amount of seed funding available guarantees more advantages as compared to deliberately taking a lower amount of funds. Both sides present solid explanations as well as reasons why it is important for their line of reasoning. That said, however, accepting the maximum amount of funding promises considerably more advantages for the startup as compared to deliberately accepting a lesser amount even when one qualifies for more funding. In light of this then, my objective is to shed more light on why it is advisable to accept the maximum amount of funding. I will discuss the various reasons why more capital is better in the following sentences. Now some people are naturally wired to always accept the most given to them, so my explanations on this point is not needed. However, there is a considerable number of people who believes it will demonstrate greater virtue to not accept the greatest amount, and they feel that added brand building virtue will benefit them in later rounds of funding. My objective is not to say that this mind-set is always incorrect, but to point to many reasons why in some instances it could put a business at a disadvantage. Combined with the fact that this behavior, which maybe virtuous to some, is not always rewarded in the business world. So if you are of the mind-set to take less, I will feel that I accomplished my goal if you at least consider the pros and cons prior to making a decision, regardless of what decision you make.
Maximum Capital Allows for the Maximum Achievement of Goals and Milestones
New businesses face numerous challenges as well as setbacks when trying to penetrate their particular markets. The challenges may include stiff competition from competitors, lack of knowledge, lack of skilled labor, and lack of operating funds, among others (Cavalieri, 2016). To add on this, the business has to efficiently set its goals and milestones that it aims at achieving, both on the long term and on the short term. This means that the entrepreneurs may have limited knowledge of the future challenges that may arise and oftentimes employees without the adequate experience on the various challenges that may affect them, combined with the task of trying to accomplish their goals. Accepting the maximum amount of funding in such a scenario would ensure they have enough capital to effectively accomplish all the goals and milestones they set aside for a particular financial period even if some unexpected challenges arise. In addition, maximum funding can aid in avoiding the numerous challenges and setbacks; for instance, it can help in funding marketing campaigns that would potentially be effective in dealing with immediate competition. That said, however, entrepreneurs should balance on the level of dilution when accepting maximum funding, but it should not be a deterrence to accepting the maximum amount of funding available.
Maximum Funding Allows for Raising for the Next Fiscal Round
Financial rounds for businesses are often characterized with intense financial turbulence that result in many of the businesses going under in extreme cases. This is usually due to the financial constrains in the initial financial periods. The financial constrains often limit for strategic planning of available funds for next the financial rounds, as the entrepreneurs become bombarded with many setbacks all at once and fail or neglect to plan for strategic planning. With maximum funds, however, it is possible to plan for the next financial rounds, thus ensuring business continuity. Ideally, economists advocate for planning the next round for businesses to be done for around eighteen months. With the maximum amount of funding, this allocation is achieved efficiently.
Accepting the Maximum Funding Could Increase a Business’s Worth
With maximum funding, it is possible to acquire the best technology and assets for the particular market segment while still having and attracting the best skilled workforce. Acquisition of the best technology and skills enables speedy achievement of the laid-down goals and objectives. This in turn creates a solid and positive reputation for the business, consequently enhancing its worth as a go-to firm for the particular service or product the organization offers. The positive reputation created has an effect of enhancing the business name, which is an important parameter in the science of business valuation (Trugman, 2016). Additionally, accepting the maximum funding available communicates that the investors have a strong investment as well as intrinsic values for the business. This further amplifies the value of the business, in that it reflects that all the stakeholders are significantly invested in ensuring the success of the business in the long term.
Accepting Maximum Funding Enhances a Company’s Return on Equity
Some may argue that the more the funds accepted, the more the time taken on return on equity and the subsequent interests incurred (Anwar, et al., 2018). While this may be true, the maximum funding essentially means more money available for business execution. Many argued that Amazon was not fiscally responsible in terms of the amount of money it gathered and invested into the execution of the business, but that investment has more than paid off in the long run. One of Jeff’s strategies was to purposely have low profit margins so that he wouldn’t attract too many competition (Mohammed, 2018 https://medium.com/@shahmm/how-did-amazon-build-its-sustainable-competitive-advantage-88cfee7fe2c8). In essence then, the more funds available can be utilized by the business to fast-track major business operations such as marketing, enabling strategic acquisitions, product design, beta testing, and the eventual rolling out to the target markets of new products and services. All these business operations need funding and are essential for the success of any business venture. With enough funding, it is possible to perform all of the operations without leaving out any of them. More funds ensure all of the above operations are carried out in a speedier manner, resulting in the firm’s break-even period being enhanced and reduced.
Accepting Maximum Funding Enhances a Business’s Current Ratio
A business’s current ratio aims at evaluating to what extent a business is able to take care of itself over the next fiscal period. The current ratio is calculated by dividing a business’s current assets contained in the balance sheet with current liabilities, also contained in the balance sheet’s liabilities section. It measures if a firm possesses optimal resources for sustaining itself over a financial year (Boyas and Teeter, 2017). When an entrepreneur accepts the maximum amount of funding available, it directly increases the business’s available resources, which are essential for sustaining it over the financial year.
Reference List
Anwar, S., Fathoni, A., Gagah, E., 2018, “ANALYSIS OF THE EFFECT OF CURRENT RATIO, TOTAL TURNOVER ASSETS, DEBT TO EQUITY RATIO AND NET PROFIT MARGIN ON CHANGES OF PROFIT WITH ON EQUITY RETURN AS INTERVENING VARIABLES ON PHARMACEUTICAL COMPANIES LISTED IN INDONESIA STOCK EXCHANGE (BEI) 2013–2017 PERIOD,” J. Manag. 4.
Boyas, E., Teeter, R., 2017, “Teaching Financial Ratio Analysis using XBRL, in: Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL Conference.”
Cavalieri, S., 2016, “The role of 3Ts factors in the birth, development and success of a startup.”
Drehmann, M., Illes, A., Juselius, M., Santos, M., 2015, “How much income is used for debt payments? A new database for debt service ratios,” BIS Q. Rev. Sept.
Trugman, 2016. Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses. John Wiley & Sons.