The Market Test: Why Capital Financing Success is so Elusive

The market: that elixir of business success that directly translates into whether or not your business or project (and we focus on CRE projects) will be successful in obtaining capital financing from somewhere other than your credit cards.  Approximately 23% of businesses surveyed in the National Small Business Association Year End 2017 Report cited changing consumer purchasing preferences as their chief challenge.  Do you think the capital markets are ignorant of this matter?  If you do, you are probably living in a fool’s paradise.  Every capital financing proposal is subject to market testing.  The market analysis has to be independent, provide demonstrable evidence of market support and a plan for dealing with advances in technology that can lead to new forms of competition that could eat away at your revenues and the value of your income-producing capital assets.

And it doesn’t end there…

Changes in the market are inevitable and it is just not possible to project market conditions beyond the 2-year window with any amount of certainty that is worth betting investment dollars upon in today’s capital markets.  The reality is that you can’t expect to manage the myriad of market risks by simply conducting a market analysis once a year or once a quarter on an ongoing basis.  If you are going the private placement offering route (i.e.: seeking capital through the broker-dealer market) the compliance requirements of FINRA and the SEC for due diligence demand a whole lot more for them to consider BEFORE they consider whether or not to support your capital financing proposal.  It always comes down to due diligence, transparency and disclosure.  If the underwriting analysis and due diligence review cannot demonstrate a market opportunity would likely exist over the near-term window you cannot obtain capital financing.  More importantly, if you cannot demonstrate the business can manage execution risk and the mitigation of potential loss events due to execution risk if the promoter were to be taken out of the business, you will fail to obtain capital financing.

Historically, capital market participants relied upon subjective measures like experience, personal wealth, reputation, credit and other equally subjective measures to make that all-important “gut call” on whether or not the business would manage credit risk or technical default risk.  That’ won’t cut it anymore because FINRA and the SEC are tired of the avalanche of investor complaints of investment fraud.  The “gut call” approach only guarantees there will be future investment fraud complaints when things don’t go well.  In today’s world, you have to meet a new standard: will the business likely manage investment loss risk if the promoter (or any other employee for that matter) is no longer with the company or not?  Does the documentary evidence suggest the next person taking the job will be able to pick up the ball and run with it or will there be potential losses while everyone figures out what to do next?

This is the elephant in the room that nobody wants to talk about because nobody has wanted to address the real issues of business planning and due diligence standards.  The herd has continued to run off the cliff and your business funding prospects are likely to run right along with the herd by failing to address how market risk is going to be proactively managed.

You can change that.  Be The One.

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