What is growth financing? An overview

What is growth financing? An overview

 

Growth is a necessity in business, it allows 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, businesses need capital. In this article, we will discover the financing of growth and how it works

 

What is growth financing?

 

Growth financing represents the use of a company's equity, debt, and hybrid financing techniques for profitable business expansion. Financing for growth should focus on identifying the optimal financing solution for a business.

 

The financing structure is tied to the value of the business based on cash flow and growth potential. Optimal financing structures for acquisitions are tailored to the client's situation and may require corporate financing techniques and non-standard funding sources.

 

 

 

Growth financing is a loan, usually backed by your company's assets, that provides the capital needed to support an opportunity that would significantly increase your company's sales.

 

How is it generally structured?

 

Financing for growth 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 be resource intensive, 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. Vendor financing is often prevalent, although it can be more expensive than other methods of financing to add or upgrade equipment and for vendors to pay off other options such as financing by Borrowing and bridge financing are important mechanisms for small and medium enterprises to access financing for growth.

 

 

 

These options often combine aspects of equity and debt financing. Business development agencies and other alternative lenders offer high approval ratings for these financing options, many of which are geared towards the financing needs of small and medium-sized businesses.

 

Business Growth Funding Guide

 

Sound financial planning is the foundation of any business growth strategy. First, you need to determine how much investment you will need to fund the business when you need it when it becomes available and how quickly you can repay the capital.

 

List all 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, especially because expenses will almost certainly increase sooner and faster than revenues. You must have enough money in the pot to maintain the main activity. It's also a good idea to amass a surplus as projects like this 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 subsequent funding.

 

Financial investments : In addition to bank financing, companies seeking equity have three main sources. Debt can be an effective way to maintain ownership for management as the business grows.

 

 

 

Equity financing: Equity financing is money invested in a business that is not directly repayable; It could be yours, probably by moving assets, or other people's money raising shares to own the business.

 

Venture Debt : For start-up businesses, venture debt is the best option. Startups have typically raised venture capital from venture capital funds, are growing rapidly, cash flow is negative, and will likely require more capital investment for a few months before the next round so the company can do more.\

 

The typical leverage ratio offered by lenders is usually 20-35% without a deal. The total loan price includes processing fees, a fixed interest rate within a range of 10% to 12% and warrants (right to buy shares, usually 0.5% to 1% equity) of the capital -venture, 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 business in exchange for capital.

 

 

 

business angels : These 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. Grants, business grants or loans may also be available in your area

 

Growth Loans and Lines of Accounts Receivable : When businesses have experienced predictable growth and revenue, growth loans and/or lines of credit become viable options. Growth loans typically have obligations that are set at certain revenue, EBITDA, or cash levels that the business must meet; otherwise, the interest rate increases for the duration of the geographic expansion default. They should not be considered for start-ups that lack sustainable models or where the realistic business plan does not exceed agreed levels.

 

MRR (SaaS) Lines of Credit : For growing SaaS businesses with Monthly Recurring Revenue (MRR) above £500,000 that need working capital, SaaS Lines of Credit are worth exploring. The line of credit may include covenants and/or warrants depending on the company's cash consumption. Credit balances used bear interest and the availability of the line of credit increases as the MRR increases. However, SaaS lines of credit are not suitable for businesses with high churn or for financing cash track.

 

Growth Funding Opportunities

 

Reinvestment of earnings: Financing growth typically means reinvesting all earnings back into the business, leaving minimal, if any, working capital on the balance sheet with current needs.

Financing of production units: Controlling your production is a decisive competitive advantage. Contract manufacturing often leads to operational inefficiencies and higher costs instead of owning production capacity. Ownership provides manufacturers with absolute quality assurance and increases on-time product delivery. Revenue streams offering contract manufacturing, warehouse storage, etc.

SBA Loan Growth: The Small Business Administration (SBA) loan program offers unique growth opportunities for craft brewers. 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 in future profits. Good equity investors can also contribute intangible value in the form of industry experience and beneficial industry relationships.

Collateral and metrics: Conventional lenders require collateral and balance sheet metrics to extend credit; something that is often rare during expansion. They need this security because they are not paid to take the risk. A strong bank has a return on assets of around 1.75%. To put that into perspective, equity investors are looking for returns of 30% or more.

When to finance the growth of your businesses

 

Knowing when to fund growth can sometimes be a challenge for many small business owners. For most companies, 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 growing their business; while others take a very conservative and slowly growing approach. Whichever approach you take to your business, how do you know when it's time to expand and how do you know if borrowing money 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 telltale signs that it may be time to grow up:

 

Your current customers want to buy more: Being able to satisfy their customers' buying desires is a challenge that most business owners want to face. It 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 grow. For example, if you are a plumbing business and home building is growing, it might be time to add a plumber or two to meet potentially growing demand.

You Need More Space: Sometimes that'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 encourages growth.

Find a companion product that can increase profits: Sometimes there are opportunities for growth in the form of related products that you can add to your already offered ones. For example, a florist may find a new range of sweets 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, it may make sense to finance growth with credit. You currently have a healthy business with 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 drive growth. The cost of taking out an equity loan should be considered before talking to anyone. Spend additional capital to grow your business.

 

Borrowing is a serious decision that should not be taken with a “pants-shaped” approach. Make sure you have thought about how you will use leverage to grow your business. Do you have an expected return on investment on debt investment? Do you know exactly how much you need?

 

The better you can answer these questions, the more loan capital will do what you want and the more willing a lender will be to offer you a loan. Instead of doing extra business: Talking about growth and preparing for it are sometimes two different things.

 

If you don't know how to handle the extra business, it may not be wise to take on the burden of debt. to make it easier. When you have a plan and process that scales successfully for growth and you simply lack capital, you can better use leverage to fuel growth.

 

That you only need capital to grow is a scam. However, before borrowing, it is important to ensure that the economics of the loan make sense. Does the cost of borrowing make sense given the expected ROI of the growth project?

 

Can you make recurring payments? Do you have a contingency plan in case something goes wrong? So many questions you need to answer before applying for a loan to finance your growth.

 

Conclusion

 

For businesses looking to take their accomplishments to the next level, growth financing provides the resources to make it happen. Alternative lenders offer fast, flexible and easy application processes suitable for small and medium-sized businesses. It is important to look for a proven track record.

 

References

 

saratogainvestmentcorp.com/articles/growth-financing/

economictimes.indiatimes.com/definition/growth-capital

prestigecapital.com/situation/growth-financing/

cotpac.com.au/blog/growth-finance-what-are-your-options/

entrepreneurship.org/articles/1997/03/financing-growth-more-than-a-matter-of-money