You have started your business and you have had some success and it’s time to take it to the next level in the business lifecycle. But in order to grow you need liquidity, so you have to make sure you have adequate cash in place to meet your short-term debt and financial obligations.

For most small businesses, the need to create long-term value with only limited resources can be a real challenge; building sustainable growth doesn’t just happen because your business is making money now, it takes long-term vision and strategic planning.

Sustaining growth is about proving that your business could withstand operational ups and downs including a fall in sales, a capital shortage, loss of a key customer or customers not paying invoices on time.

You know you need to fund growth but where do you find the funding? In this blog we look at potential sources of funding such as business loans:

• Why growth?
• Challenges
• How your business grows
• Debt funding
• Equity funding

Why growth?

What is business growth? Business goes through a number of stages during its lifecycle and the growth stage is just one of these stages.

A business lifecycle looks something like this: start-up – scaling up – growth – expansion – maturity – decline.

Successful businesses grow from the start-up phase, albeit at different rates. Your funding needs will be decided by the rate of growth at each stage of your business life cycle.

Challenges

As your business grows, you’ll need to deal with challenges that arise from increasing sales expectations and the need to generate working capital and cash reserves. For example, more sales could mean increased stock requirements for which you’ll have to pay.

Of course, each stage in the life cycle has its own set of challenges that affect how you fund your business.

How your business grows

How do businesses grow? They grow through increased sales, through acquisition, through taking on more people. But all these things cost money, and in most cases, will require some kind of funding to sustain it.

Investing in expansion or new acquisitions means you’ll need more working capital, which may well lead to liquidity issues and the need to improve your cash flow. Therefore, it’s extremely important to understand the challenges that face your business as you grow, so that you can properly plan and prepare for funding.

Debt options

Debt funding means borrowing money to fund your business growth. Whether or not you can borrow cash will depend on lenders’ willingness to lend to you, based on how much of a risk they see you as.

Here are  some examples of the debt options available to you:

• Credit cards: This can be an expensive form of funding if you don’t pay off the balance on the card at the end of each month. Typical APR is 15-25% so they are good for managing cashflow in the short term but not so beneficial for longer term funding needs. You also need to bear in mind that some cards also charge annual fees and inactivity fees.
• Bank loans and overdrafts/lending credit facilities: Bank loans or maintaining an overdraft on your business account are more cost-effective ways of managing cashflow in the longer term because interest rates are lower than those for credit cards.
• Leasing/HP: Hire purchase and leasing are great options if you are seeking to fund the acquisition of capital equipment for your business.
• Commercial mortgages: In general terms this is a mortgage held on a property you don’t live in. There are two types: a commercial mortgage to fund the purchase of business premises or a commercial investment mortgage to fund the purchase of premises to rent out.
• Trade Finance/supplier payment finance: This is where you use firm orders from your clients to fund the gap between paying the manufacturer and receiving payment from your customer. The funder purchases the goods and imports them for you. But they keep the title to the goods until you pay them. It helps you negotiate better terms with the manufacturer and it’s better than turning down an order. Watch out though as it’s not cheap, so keep term as short as possible.
• Stock finance: This one’s perhaps the most difficult type of debt funding to obtain. It’s ideal for purchasing fast moving, high margin products at busy times of the year like Easter and Christmas. The typical set up fee is 2% with an interest charge of 3% plus per month for a minimum of two months.
• Sale and leaseback: Often used by companies as way of offering up cash, sale and leaseback is a way of raising capital on plant and machinery you already own. Your equipment will have normally depreciated over five or more years, so there’s often little value on the balance sheet but in reality, it’s still worth something. The funder will buy the equipment from you then lease it back to you, freeing up working capital for your business. This option is available even on plant and machinery that’s halfway through a finance agreement.
• Factoring/invoice discounting: These are two ways of releasing the funds for liquidity that are tied up in your unpaid invoices. With factoring your customer pays the outstanding invoice amount to a third-party factoring company. With invoice discounting they pay you direct; a more discreet option as your customers will be unaware that a third party is involved. You can release up to 90% of your outstanding invoices quickly and funding can be acquired without risking other assets.
• Enterprise Funding Guarantee: Run by the government’s British Business Bank an EFG encourages lenders to finance small businesses who present a robust business plan but lack security. The scheme underwrites loans to provide a guarantee in the absence of collateral.
• Merchant Cash Advance: Allows you to borrow capital for your business against card payments to help your cash flow. Repayments are an affordable percentage of your daily card takings, so you only repay when you get paid.

You will need to think about how much the borrowing will cost you in the short and long term.

Equity options

Equity finance is the process of raising capital for your business by selling shares in your company to investors. You can raise funds for short-term needs, such as paying for stock, or you can use it to raise funds for longer-terms needs by selling shares in your business in exchange for cash. You’ll need to prepare a prospectus and explain what you plan to do with the funds raised.

Here are a few options:

• Angel finance: Angel investors are affluent, high-net-worth individuals seeking convertible debt or ownership equity by providing capital to business start-ups. They either provide a single injection cash into your business to fund immediate operational needs or provide financial backing through a series of investments over time.
• Crowdfunding: This is where lots of people invest small amounts individually into your business, which cumulatively adds up to the funding you need. There are lots of crowdfunding websites where you can pitch your business for funding. It’s about more than just promoting your pitch because you’ll need to do the work to generate interest in the first place; but then it’s down to business. Most interested investors will want to carry out their own due diligence to satisfy their risk criteria, so make sure you have a sound business plan that demonstrates a robust and achievable strategy.
• Private equity/family offices: Not listed publicly, private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies. Again, this is a way of raising funds to improve your liquidity, but you risk relinquishing control of your company.
• Venture capital: This kind of funding for growing businesses usually comes from companies building high-risk financial portfolios. They provide you with funding in exchange for a stake in your business. Normally, venture capital firms provide funding at the early stages of business that have high growth potential. Whereas, private equity firms will typically invest in a mature company.
• Regional Development Funds: These invest in SMEs on a regional basis. Examples include the Midlands Engine. 

With equity funding you will need to consider how much control of your business you are willing to give away to a third party.

Download our whitepaper on funding sources for more information.