Growth is inevitable in a business, but is it if you don’t have the money to
grow? Essentially, business growth occurs when a business reaches the
point where it needs to expand and is looking for new ways to make more
revenue. Businesses require financing to facilitate this growth. This is called
‘growth finance’. Growth Finance is a company’s use of debt, equity and
hybrid financing techniques to achieve business expansion in a
cost-effective manner. (Source). The goal of growth financing should be to
find the best financing option for your business.
Here are 7 tips to help you do just that:
- Have a clear goal - Understand what you're trying to fund and how much it
will cost, whether it’s to invest in an asset or simply hiring a resource. It's critical
to have a clear aim in mind in order to determine the best approach for your
business.
Financing comes in many forms, some of which perform better than others
depending on what is being financed. Ask yourself, ‘should I do a one-time
purchase for business equipment or should I purchase a resource that will be
used over time?’ and continue charting your goals from there.
- Understand your financial options - This includes internal/self-financing or
external/third-party financing. Examine your circumstances. Do you have
enough money in the bank in which you’re capable of self-financing or would
you require external funding?
Each option has its own set of advantages and disadvantages that must be
weighed in the context of your business. If you are using your business’ limited
cash resources to finance your business growth you must consider whether
your business will be able to survive without that money. You must also
consider how long it may take for you to generate that amount of cash again
within your business.
External funding may entail taking a loan and repaying monthly instalments.
Ask yourself, ‘Is my business’ monthly cash flow sufficient to accommodate
this?’
- Long-term vs. short-term financing - In the context of finances, long term is
defined as anything lasting longer than one year, whereas short term is defined
as anything lasting less than one year. What exactly is the significance of this?
Well, much like the possibilities in the previous tip, each option has
ramifications for your business that must be examined. The goal you’ve
determined for your business will also determine whether short term or long
term financing is best for you. A large purchase such as equipment or a
vehicle, for example, is better suited to long term financing.
- Surplus Management - When managing your money to finance business
growth, you have to consider what to do with any excess funding you may have.
The surplus is whatever is left over after paying all of your operational
expenditures and keeping the firm functioning smoothly. It isn't the amount of
money you have left over after deferring payment from one month to the next.
If you do encounter a surplus, you can opt to save money for a rainy day or
use it as a short term investment to earn interest and work for your business.
You can even use it to pay off your debts sooner, however, you should be wary
of this option in case your agreement includes early repayment penalties.
- Manage your credit rating - Acquiring a loan or even a credit card is
dependent upon your credit score which communicates your creditworthiness
to financial institutions and potential investors. Pay close attention to your
credit rating and if it's not up to par, make every effort to improve it. This can
simply be setting up reminders in your accounting system to pay bills on time
or even taking out a modest loan and repaying it in a timely manner to create
and maintain a good credit rating.
If your objective is to purchase a vehicle next year, don't wait until then to
check your credit score. Check it out right now and keep working on it so you're
in the best possible position when it’s time to apply for the loan.
- Investment financing - An investor is an alternative approach to fund your
business growth. Investors usually provide equity financing, where they buy a
10% or 15% stake in your company and receive a dividend payment. Investment
financing can also be venture capital financing, such as those seen on the hit
TV show, Shark Tank, where money and experience are injected into your
business. So, before you have to pay anything back, investment financing gives
you the room to actually accomplish the things that will build your business, as
compared to a loan where you have an immediate commitment to repay.
- Grants/ subsidies/ tax incentives - These are excellent options for obtaining
funding because they do not require repayment and you can qualify simply by
operating your business. When the government or other entities want to
stimulate specific economic activities, these are offered. Because of our
tourism industry, hotels and guesthouses in Trinidad and Tobago, for example,
are given incentives. So do your homework to see if your business qualifies for
any grants, subsidies or potential tax incentives.
Business financing options come in a variety of forms. Because the objective is
to contribute to a sustainable growth structure for your business, you’d want
to be sure that the solutions you choose pass the cost/benefit test, especially
when financing for growth. It's important to remember that growth isn't only
about sales and profits. Within the framework of your business, growth can
happen in less obvious ways but be just as meaningful in the long run.
Works Cited:
What is growth financing?: Meaning & definition. What is Growth
Financing? | Meaning & Definition. (2019, April 30). Retrieved May 13, 2022,
from https://www.attractcapital.com/growth-financing.html