In business, there is such a thing as a ‘good problem’
One example is a business which provides a good product or service in high demand by customers. The business needs to produce more and invest in marketing, sales, and customer management. There’s an opportunity to grow which should be good news… but what happens when the business doesn’t have the cash to fund this growth?
How to finance growth will depend on several factors, including the company structure, how you will use the funds, the stage of growth, and your industry. Also influential will be your long-term goals. What business do you want to build exactly?
In this light, let’s look at some financing options.
A business generating high cash flow (now or in the future) may get the attention of a bank or similar lender. The bank will need to be persuaded that the business can repay the loan with cash flow. For example, an established retailer with fast-selling inventory and strong profit margins may need cash to purchase larger quantities of inventory. A lender may offer a line of credit that is repaid as the inventory is sold.
Most lenders will ask for security on any loan, depending on the level of risk they are taking. This works if the borrower is willing to take on additional risk AND has assets which offer the lender the security they need.
Different lenders will have different thresholds for offering loans. For example, ‘friends and family’ may be a relatively ‘easy’ source of capital… but this can put relationships at risk.
Perhaps there is considerable wisdom in the words of Polonius in Shakespeare’s “Hamlet”: “Neither a lender nor a borrower be…”
Inevitably, other businesses will target the same customer as you. Some of them will have adequate resources (e.g. cash) but no interest in competing with you.
For example, perhaps you provide B2B software to a certain industry but lack the funds to launch a strong marketing campaign to grow quickly. You could partner on marketing initiatives with a consulting firm that advises clients in that same industry.
Partnerships like this will succeed if there is a genuine ‘win-win’. Both entities need to emerge stronger in terms of sales, profitability, market penetration, or reputation. If well-designed, these partnerships can propel a business to the next level.
There are many factors to consider here… including the probability of your business succeeding. If your business is early stage, you’ll need an investor with a big risk appetite. And you’ll probably need to give away a lot of equity in return for the investor’s cash.
On the other hand, if your business is ‘mature’ with a strong track record, you will attract a different kind of (lower risk) investor.
Think about any investor’s long-term goals and try to align them with your own. For example, a FINANCIAL investor looks only at the ROI on their investment within a certain timeframe. A STRATEGIC investor looks to create value from certain synergies, perhaps by gaining access to your customers, intellectual property, geographical footprint, management team, etc.
Investor relationships are usually for the long term so it’s best to enter these discussions cautiously.
The Preferred Strategy
Ideally, a business should fund its own growth through cash flow. This will not always be possible and business opportunities may be lost, in which case, external sources of finance can be considered.
Whichever path you take, you’ll need to get really clear on your business goals and then articulate a clear business and financial case to your counterparts. This can take a lot of time and distract leaders from running their businesses.
Seek professional advice as you think through the options and set the plan to build exactly the business you want.
Considering financing options? Get in touch with the award-winning team at Alliott NZ in Auckland on 09 520 9200.