Jeff Reinstein, CEO of Premier Business Centers and Finance Expert, shares tips on how flexible workspace operators can raise capital, and which method he prefers best and why.
This article is part of our best practices series.
In your experience, how should workspace operators start the process of raising capital?
If an operator is looking to acquire an existing business centre or flexible workspace, I would ask the sellers if they are willing to carry back a note. This will usually result in a good interest rate for the seller on the sale price, while also allowing the buyer to avoid the hassle of raising money. This approach also generally means a lower interest rate than the buyer would have to pay if they were to borrow money.
In terms of opening a new location, typically now landlords will provide most of the start-up capital for a new workspace center other than working capital.
How often should workspace operators seek to obtain external capital?
I think that the best time to try and raise money is when you don’t need it. I aim to always keep my eyes open for potential investors or opportunities to raise capital. However, I also would recommend to workspace operators to work with their bank to obtain a line of credit. Here’s how I would do it: I would obtain the line of credit, then I would borrow that money and pay it back several times during the year to prove to the bank that you are, indeed, ‘creditworthy’.
The more time you borrow the money and pay it back, the easier it gets to increase your credit line and borrow money when you need it.
How can workspace operators focus on raising capital internally?
At Premier, we set aside a portion of our cash flow for acquisitions. This allows us to take advantage of opportunities without having to raise capital.
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What are some rules of thumb to follow when raising capital?
The two main ways to raise money are either through debt or equity.
Debt generally has a lower interest rate, but it will usually require that you make a minimum monthly payment. During difficult times, it might not be possible for operators to make the payment, which could result in losing your workspace business or at least losing control of it.
If you sell an equity stake for your business in order to raise capital, there may be a preferred return that either needs to be paid or accrues, and must be paid when there is excess cash flow. Equity is considered to be a more expensive alternative to debt, given that one needs to give up part of the ownership and the possibility to fully control the business.
Additionally, there are some hybrid options that include a combination of debt and equity.
Which method would you recommend?
I am personally very debt averse since my experience has been that during difficult times companies that are saddled with too much debt generally fail. As a result, we at Premier do not have any third party debt.
What are some ways to minimize the risk associated with raising capital?
For this, I would recommend workspace operators hire someone that they can trust to help them navigate through the different options. It’s important for operators to understand the pros, the cons, and the potential risks associated with each alternative.