Growth is a necessity in business, it enables entrepreneurs to seize new opportunities, expand their products and services, acquire new customers, increase sales and hire employees.
Market requirements. It can also give a company more credibility and allow it to avoid competition. But to grow successfully, companies need capital.
In this article, we’ll learn about growth financing and how it works.
What is Growth Financing?
Growth financing represents the use of equity, debt, and hybrid financing techniques of a company for profitable business expansion. The focus of growth financing should be on the identification of the optimal financing solution for a company.
The financing structure is tied to the cash flow-based value of the business and the growth potential. Optimal financing structures for acquisitions are tailored to the customer’s situation and may require corporate financing techniques and non-standard financing sources.
Growth finance is a loan, generally backed by your business assets, that provides the capital needed to support an opportunity that would significantly increase your business’s sales.
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How is it usually structured?
Growth financing can take many forms, from lines of credit from a traditional bank to SBA loans from the federal government(Small Business Administration).
All of these can generate considerable resources, but some of them are difficult to access while others require considerable size, time, and documentation to get started.
In the first case, companies can offer discounts in exchange for a long-term commitment to purchase a product. Sellers financing is often widespread, although it can be more expensive than other financing methods for adding or upgrading equipment and having sellers repay other options such as debt financing and bridging finance are important mechanisms for small and medium-sized businesses to gain access to growth finance obtain.
These options often combine aspects of equity and debt financing. Business development agencies and other alternative lenders offer high approval ratings for these funding options, many of which are geared towards the financial needs of small and medium-sized businesses.
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Guide to Financing Business Growth
Solid financial planning is the foundation of any business growth strategy. First of all, you need to determine how much investment you will need to fund the business when you will need it when it will be available, and how quickly you can pay back the capital.
List all of the costs incurred to launch your growth option and compare them to the expected revenue. You need to be realistic and practical in setting business growth goals. Here are some of the guides you should follow:
Financial Forecasts: A detailed cash flow forecast is essential, not least because spending will almost certainly rise sooner and faster than income. You need to have enough money in the pot to keep the main business going. It is also a good idea to amass a surplus because projects of this kind are often behind schedule. In addition to cash flow, you may need to make detailed projections of sales, working capital, and sources of initial or further funding.
Financial Investments: Aside from bank financing, companies seeking equity have three main sources. Debt can be an effective way to maintain the property for management as a business grows.
Equity financing: Equity financing is money that is invested in a company that is not directly repayable; It could be yours, likely by moving property, or money from others who are raising shares to become owners in the company
Risk Debt: For early-stage companies, risk debt is the best option. Startups have typically raised venture capital from venture capital funds, are growing rapidly, cash flow is negative, and are likely to require more capital investment for a few months into the next round so that the company can achieve more.\
The typical leverage ratio offered by lenders is usually 20 to 35% without an agreement. The total price of the loan includes a processing fee, a fixed interest rate in a range of 10% to 12%, and warrants (entitlement to purchase shares, typically 0.5% to 1% participation) venture capital, also known as private equity financing. Unlike business angels, venture capitalists seek to invest large sums of money in (i.e., an interest in) your company in exchange for capital.
Business angels: They are private investors who take a minority or majority stake in a company and often have valuable business experience in the form of advice and contacts. Subsidies, business grants, or loans may also be available in your area
Growth Loans and Accounts Receivable Lines: When businesses have grown and predictable revenues, growth loans and/or lines of credit become viable options. Growth loans generally have obligations that are set at certain income, EBITDA, or cash levels that the business must meet; otherwise the interest rate increases for the duration of the default for geographic expansion. They should not be considered for early-stage companies that lack sustainable models or when the company’s realistic plan does not exceed the agreed levels.
MRR Lines of Credit (SaaS): For growing SaaS businesses with monthly recurring revenue (MRR) over £ 500,000 who need working capital, SaaS lines of credit are well worth exploring. The credit line can have covenants and/or warrants depending on the company’s cash burn. The credit balances used bear interest and the availability of the credit line increases as the MRR increases. However, SaaS lines of credit are not suitable for companies with a high churn rate or to finance the cash track.
Opportunities in growth financing
- Reinvesting Profits: Funding growth generally means reinvesting all profits in the business, leaving minimal, if any, working capital on the balance sheet with current needs.
- Financing of production plants: The control of your production is a decisive competitive advantage. Contract manufacturing often leads to operational inefficiencies and higher costs instead of owning production capacity. Ownership offers manufacturers absolute quality assurance and increases the on-time delivery of the product. Sources of income offering contract manufacturing, warehouse storage, etc.
- SBA Loan Growth: The Small Business Administration (SBA) loan program provides craft breweries with unique growth opportunities. Small Business Administration (SBA) loans are an alternative that often bridges the gap between the equity phase and the conventional loan phase.
- Investors and partners: Equity investors can be a good source of capital during expansion phases, as they rely on future cash flows and share future earnings. The right stock investors can also bring in intangible value in the form of industry experience and beneficial relationships with the industry.
- Guarantees and Measures: Conventional lenders require guarantees and measures on the balance sheet to extend credit; something that is often scarce during expansion. They need that security because they aren’t paid to take the risk. A strong bank has a return on assets in the range of 1.75%. To put this in perspective, stock investors look for returns of 30% or more.
When to finance growth for your businesses
Knowing when to finance growth can sometimes be a challenge for many small business owners. For most businesses, growth is an option, not a survival factor, although it is usually a very attractive option.
Some business owners take a very aggressive approach to grow their business; while others take a very conservative and slowly growing approach. Whichever approach you take with your business, how do you know when it’s time to grow, and how do you know if borrowing funds to fund growth is a good idea?
For successful businesses that don’t pursue aggressive growth, many small business owners want their business to grow quickly. With that in mind, here are some tell-tale signs that it might be time to grow up:
- Your Current Customers Want To Buy More: Being able to fulfill their customers’ buying desires is a challenge that most business owners want to face. This can also be due to an influx of new customers who want to buy your product or service and need to expand to meet the additional demand.
- Your market is growing: An emerging market can be a great opportunity to expand. For example, if you’re a plumbing business and home construction is growing, it may be time to add plumber or two to meet the potentially growing demand.
- You need more space: Sometimes it’s a good reason to outgrow your current space. As your business grows, customers grow and you need more inventory. Expanding your location or moving to a new location promotes growth.
- Find a companion product that can increase profits: Sometimes there are growth opportunities in the form of related products that you can add to yours already on offer. For example, a florist may find a new line of candy or chocolates to sell; or you can hire an ice sculptor for weddings and events where flowers usually play a role.
How do you know if this growth is worth financing?
If the following describes your business, financing growth with credit can make sense. You currently have a healthy business with a positive cash flow. Borrowing money to grow is much easier (and certainly more useful) when you have a healthy business.
A lender wants to know that you have the funds to make the regular payments associated with a loan to fuel growth. The cost of taking out an equity loan should be considered before speaking to anyone. Spend extra capital to grow your business.
Borrowing is a serious move that shouldn’t be taken with a “fit in your pants” approach. Make sure you have thought about how you will use the leverage to grow your business. Do you have a projected ROI on debt investment? Do you know exactly how much you need?
The better you can answer these questions, the more likely the loaned capital will do what you want, and the more likely a lender will be willing to offer you a loan. Instead of doing the extra business: Talking about growth and being prepared for it are sometimes two different things.
If you are unsure how to deal with the extra business, then it might not be wise to take on the burden of debt. to make it easier. When you have a plan and process that successfully adapts to growth and you just lack capital, you can make better use of leverage to fuel growth.
That you only need capital to grow is a scam. However, before borrowing, it is important to make sure that the economy of the loan makes sense. Does the cost of borrowing make sense given the expected ROI of the growth project?
Can you make recurring payments? Do you have an emergency plan in case something goes wrong? These are all the questions you need to answer before applying for a loan to finance growth.
For businesses looking to take their achievements to the next level, growth financing provides the resources to achieve it. Alternative lenders offer speed, flexibility, and easy application processes that are tailored for small and medium-sized businesses. It is important to look for a proven track record.