Raising Capital in the New Normal: Advising Your Clients in Today’s Market
By David Gibbs, CPA, CCIFP, CRE, MBA, McCarthy & Company PC –
March 23, 2022
In light of the turmoil from COVID-19 and its implications over the last several years, we’ve seen how the business landscape has changed. While the avenues for raising capital are the same, the landscape has shifted. Understanding the shifts in the landscape can help CPAs better direct their businesses and clients toward successfully raising capital. Here is the current state of the market and how it shapes the routes for raising capital.
Private Equity Investments
The new-normal era has spurred many investors into the market, making this one of the best times in history to seek private equity investments. The market saw a 12-percent increase in new investors during the pandemic, and 19 percent of experienced investors increased their investments. However, shifts in trends, such as the transition to remote work, shopping online and expanded medical research, have changed what investors are looking to add to their portfolios.
Private equity firms are becoming increasingly interested in investments to create warehouse space (and convert existing space into warehouse space) to support the retail industry shifting more and more towards e-commerce.
In addition, investors have been flocking to support the latest research efforts in the fight against COVID-19 and beyond. Therefore, proposals in the medical or medical research areas have become more attractive to private equity firms. This includes both companies offering medical services and construction projects converting space to support this rising industry.
Currently, private equity investments are going to be the best fit to raise capital for any business in the medical or medical research industries and for businesses with a dormant space that needs to be leased. When working with a client to help them land a private equity investor for their business, the presentation of numbers should focus on showcasing the projected ROI and timeline to the ROI.
Crowdfunding has become an increasingly popular practice for raising capital in the wake of the pandemic, raising over $211 million in the U.S. alone in 2020 and more than double that figure in 2021. Communities rallied around small, local businesses through crowdfunding sites like Kickstarter, Indiegogo and GoFundMe to help keep them afloat.
The Securities and Exchange Commission adopted new regulations in 2021 that increased the maximum amount these campaigns can raise, and by 2025 the crowdfunding market is predicted to grow by nearly $200 billion.
In addition, new projects and startups have relied heavily on crowdfunding efforts. The last two years have also seen a lot of job turnover, as about 32 percent of people left their corporate jobs to pursue entrepreneurial ventures. As of October 2021, there was roughly a 6-percent increase in the number of self-employed individuals over 2020 in the U.S. and 432,101 new business applications.
Crowdfunding investors in the new normal are looking for ways to support small and local businesses, as well as entrepreneurs and startups. The most successful crowdfunding campaigns in 2021 were innovative lifestyle product startups. Crowdfunding is best for local service businesses, lifestyle product-based startups, independent creative projects and charitable nonprofits.
Appealing to a crowdfunding investor is not like talking to a private equity investor or accountant. These investors are looking to invest in things that make them feel like they’re supporting a cause or innovative idea. Rather than looking at numbers, it’s best to encourage a client to find a marketing partner, as they will need to launch storytelling-based marketing efforts to foster a connection between the investors and the business/cause.
Interest rates have dropped significantly in the wake of the pandemic, making loans more accessible. In March of 2020, the Federal Reserve Board announced emergency rate cuts which drove interest rates down to nearly zero percent. Rates have slowly begun to rise to combat inflation but remain far lower than they have been in years past.
However, banks have become increasingly conservative when it comes to granting loans as many businesses faced financial turmoil during the pandemic. This has made it harder for businesses to secure loans. Banks are looking for financial stability clearly reflected in financial statements using traditional generally accepted accounting principles (GAAP). The better a business’s financial health is, the more likely it’ll be to secure a loan.
Traditional bank loans are best for businesses in industries that are stable and less risky in the eyes of the bank. The most favorable industries for a loan in 2021 included professional services, health care, retail trade and construction.
An accountant will review the business’s loan application, so presenting financials using GAAP is crucial. When helping a client secure a traditional bank loan, it’s important to make sure the numbers are focused on showcasing the stability of their business.
In the wake of the pandemic, the Federal Government implemented relief measures to help businesses, especially small businesses, get back on their feet. The Small Business Administration (SBA) had a record year in 2020, granting more than $28 billion in traditional SBA loan aid.
These loans are also designed for individuals hoping to start a business in the new normal. SBA loans are best for clients who could not secure private equity investments and were denied a traditional bank loan. However, the businesses must meet specific requirements, including the following:
- Operate for profit
- Be engaged in, or propose to do business in, the U.S. or its territories
- Have reasonable owner equity to invest
- Use alternative financial resources, including personal assets, before seeking financial assistance
SBA loans do have a downside. These loans are accompanied by higher interest rates than traditional bank loans, higher fees and a longer approval process.
Understanding the current financial state of your business or a client’s in the new normal is the best way to determine what capital sources are available. Work with clients to assess their future goals, understand previous attempts at securing a capital source and create a plan to match their current operational needs.