You’re an early-stage startup entrepreneur. You’re running your business fast and lean. Getting your company’s financials cleaned up and organized is on your to-do list, but so are a thousand other things. You’ll get around to it — just as soon as you secure the loan that will help you scale up.
I hate to break it to you, but as long as your financials are a mess, that funding is going to stay forever out of your reach.
At Lighter Capital, we field a lot of loan applications, and the number one reason we reject potential borrowers is because the entrepreneur is unable to produce financials.
In order to fundraise effectively — from equity investors, traditional banks, or private debt providers — you’ll need accurate financials. They help investors determine terms and pricing, and they also show them that you know what you’re doing. An entrepreneur with clean financials is an entrepreneur who understands how to operate their business!
Here are the five most common problems we see in startup financials that could torpedo your ability to get funding.
1. You don’t use accounting software to track your financials
We see early-stage companies using Excel to track their financials all the time. This is fine when you’re just starting out and you’re not sharing detailed financials with third parties, but when you reach the point where VCs, investors, or lenders might want to look at your data, you need a better system.
Investors and lenders need to verify and reconcile transactions from your bank statements. Using an industry-accepted accounting software package makes verification and reconciliation much more straightforward. Not only does using an Excel spreadsheet force us to reconcile and verify your transactions manually, but it also shows that you don’t take your accounting seriously, which raises a big red flag.
Accounting software can also help make sure you do not make basic accounting errors like not balancing your balance sheet.
We recommend QuickBooks (either Online or Desktop) to early-stage tech entrepreneurs. It’s a low-cost solution that is easy to use, and includes great features, allowing you to centralize payroll, bill paying, and tax filing capabilities.
2. You have projections, but you don’t have actual financial data
When investors ask for financials, they want to see actual financial statements — not projections. Why? Because as many VCs and startup advisers will tell you, your early projections will almost certainly be wrong.
At Lighter Capital, our underwriters look at your recurring revenue to assess risk and determine pricing. If you don’t have a historical record of your company generating revenue, we won’t be able to fund you.
All investors need hard historical numbers, not guesses at what you think you’ll do. They’ll use the data you provide to make their own projections about your future success.
3. Your startup's financials are incorrect
Sometimes we review financials and they’re simply wrong. Often this is due to a mismatch between accounting line items and the accounting method.
We consider funding a lot of SaaS startups with subscription-based revenue models. These businesses are likely to receive many prepayments and have recurring contracts.
If your business model is built on revenue from subscriptions and you’re not using accrual accounting, you may be underselling your company’s performance by underreporting deferred revenue.
Learn about switching to accrual accounting while still following Generally Accepted Accounting Principles (GAAP) ➔
4. You aren’t producing monthly financials
When your company is very young and doesn’t have much variability month-over-month, you may only need to produce financials on a quarterly or annual basis. However, when you start scaling and looking for outside capital, monthly financials are a must.
Monthly financials show investors that you’re monitoring your business closely and adopting best practices for accounting. They can also illustrate revenue trends and seasonality.
For lenders providing revenue-based financing, like Lighter Capital, monthly financials are essential — loan repayment structure is a percentage of your company’s monthly revenue, so if you can’t produce monthly financials, we won’t be able to offer financing.
5. Your personal and business accounts are all mixed up
Mixing your personal and business transactions is a fundamental rule you should never, ever break. Just don’t do it, even if you’re just starting out. Not only is mixing personal and business expenses one of the most common reasons small businesses get audited, but it also makes it harder to track and report the financials investors want to see.
Investors and lenders aren’t going to want to get involved with a company that is 1. unwilling or unable to follow basic accounting practices, and 2. exposed to that much legal risk.
Getting your financials in order early on shows investors that you understand your company’s expenses, growth, and path to profitability. It’s never too soon to start thinking about how to organize your accounting practices.
Need funding to extend your cash runway?
Apply today to connect with Lighter Capital’s Investment Team; we'll reach out to discuss how we can work together to help you achieve your growth goals.