You have achieved a milestone, your business is successful and growing. Congratulations! At this point, you may find yourself perplexed about how to generate enough capital to continue growing and expanding your company. Have no fear, there are many options available to you and with the proper planning and execution, you will continue growing in no time.
There are many options available to a company seeking capital for growth and we will discuss each option here, however only you can decide which option will work best for your business.
Cash Flow - Slower Growth
Yes, cash flowing capital is an option. You will need a good forecast and a good action plan. It should be reasonably expected that cash flowing capital may delay the time it takes to accomplish your end goals over that of the other options we will discuss. However, cash flowing capital means you will not incur bank financing or give up equity in your business. Once you have your forecast and action plan in place, start allocating profits towards the total sum required for the growth or expansion plan.
Some businesses will begin growth or expansion when they have 50% of the capital required and others wait till they have 80% or 100%. There are risks at every level. At any amount beneath 100% of the capital required, you risk the business not being capable of continuing work due to restrictions in profit high and lows. The risk of waiting until 100% of the capital has been acquired is that the total cost could increase depending on the economy and how much time has passed between start and finish.
Obtaining capital through bank financing is much easier today than it was five years ago. If you have yet to establish a good relationship with your bank, you should start doing so now. Having a representative at the bank that understands your business and your goals will go a long way in helping you acquire capital more easily in the future. With this relationship, discuss options of financing. There are loans for real estate or leases, equipment, long term capital, or lines of credit. Depending on your industry of business, the bank may also have special programs that can aid your growth or expansion goals. One or many of these options in combination can be the answer to your company’s growth. Bank financing may also be your only option if you are seeking amounts too small for interest by private equity and venture capital investors.
You will need to prepare financial documents such as your cash flow statement, balance sheet, and profit & loss statement for the previous three years along with a solid forecast of your organization over the next five years with and without the growth or expansion option. Depending on the size of your organization, the bank may require a personal guarantee and additional insurance on the company or owner(s). The terms for each loan are different, meaning you could have multiple monthly payments or a deferment of payments until a specific milestone is accomplished.
Acquiring a capital investment through private equity typically requires that you trade a portion of your ownership equity to the investor for a mutually agreed upon sum. You may have the option of buying back the equity from the investor when they are ready to sell, however you would need to negotiate this option and be prepared to not have this option provided to you. Everything in private equity is negotiable. Different investors may ask for different terms, each investor will have their own set of requirements.
You will need to prepare financial documents and forecasting similar to the bank financing option. In addition, you will need a complete business plan emphasizing your growth or expansion goals and demand. A short summary page that touches on key areas of the business plan and is direct about your goals should be prepared. Finally, you will want to put together a presentation with key information and graphs describing the existing company and proposed growth projections.
Research investment firms and private equity groups that invest in your industry and in amounts of capital you are seeking. Most investment firms focus on niches and in dollar amount categories. So, if you are seeking a small amount, find an investment firm that works in this range. Once you have identified these firms, make phone calls and send your summary page. Of all that you reach out to, only a few may show interest. After a firm has a sparked interest, they will want your forecast, financials, and business plan. You will have multiple conversations with the firm so they can grasp a better understanding of what you do and where you are going. They will then use this information to seek out investors from their pool or network. It is at this time, that your eligible firms will shrink. It could take 100 inquiries to get one yes. When you have an interested party, negotiations will begin. If terms can be reached, the due diligence process will start and can take anywhere from 3 weeks to 6 months as the investor analyzes your business. After due diligence, expect more negotiations or, potentially the investor to back out. If you are able to agree on terms, congratulations! If the investor backs out, you will need to start the process over again.
Venture capital works very similarly to private equity, however the investors are firms utilizing pooled investments from a professionally managed fund seeking quick payback and large growth terms so they can make their money back and acquire a substantial profit when they sell, whereas private equity tends to hold the investment longer and seeks more reasonable profit ranges when they sell the investment.
Angel investors provide their own capital as an investment in a startup or small business prior to being able to acquire bank financing, private equity or venture capital investments. These investors seek similar financial, business plan, and forecasting information. Angel investors will require equity and, typically, a position as an advisory board member for the company. Because angel investing is risky business for the investor, high returns are expected. Additionally, the company risks dilution of equity for future investment rounds.
Angel investors can be found by seeking out angel groups or networks with a simple search on the internet.
A newer form of investing, social investing using online resources allows a company to offer a multitude of products and services in exchange for a range of dollar amounts to be invested in by individuals. The company would have a projected investment goal, a full description of the growth or expansion, and the products or services in exchange for the investment detailed online. If individuals invest in the project enough to meet or exceed the projected financial goal within the timeframe chosen, the company would receive its funding and would be expected to provide the promised products and services, as well as progress updates to the individuals that invested.
April Salsbury, MBA is a strategist, an analyst, an operational guru, a recognized leader and C-suite global healthcare executive with drive and focus for competitive markets. Co-host of The Business Forum Show and regular contributor to various business journals, she possess multi-functional and multi-national competencies with more than 15 years experience in business and healthcare. Her expertise is in invigorating revenue growth and infusing value of lean practices in growing companies through improvements to cash flow and operations management.
Fueling revenue, growth and profit, Salsbury & Co. is a consultancy firm focused on helping businesses and healthcare organizations achieve excellency. Our specialists have executive experience combined with deep functional expertise to provide our clients with services that drive real impact and results.
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