Money to Grow, Find It Here and There
Last week in “The Siren Song: The Bank as the Only Choice“, we covered why bank financing might not be the only option to funding a company in growth mode. Although banks usually offer the lowest cost of capital, it comes with strings that may very well inhibit this growth in certain situations. If a company starts small and goes big in a very short period of time, a bank is not set up to handle what they would consider extreme or fluctuating revenue growth.
Image by Flickr user orcmid, used under Creative Commons license.
Other sources of capital may include:
- Sales – There is no better way to capitalize a company than sales and profit. Increased sales with healthy profit margins is the premium method to build a company. But along with more revenues comes the equally as important skills to apportion cash flow where it is needed.
- Customers – Giving customers terms for early payment and having internal processes to keep those payments timely is another great way to fund a company. Many businesses do not get invoicing out quick enough and focus on collections well enough to help with their growth.
- Suppliers – Building credit with suppliers is another cost effective way to utilize cash flow in order to maintain a strong growth curve. By applying for credit, making timely payments and over time asking for credit increases, a company can get positive input on the radar of credit reporting agencies.
By the time you have optimized these sources, considering other resources may be beneficial. For instance: financing the purchase of equipment through leasing is a good way to spread the payments over time.Depending on the business model, in certain situations where the upside of the growth potential is attractive enough, selling equity in the company by way of angel or venture funding may be available. This avenue is, in a relative sense, costly in the long run and extremely difficult to obtain.
Mobilization capital is money up front to start a contract. This type of capital is only available from commercial sources to companies with a good strong balance sheet who have been operating for many years and have a positive history of performance both with what they do, and who they do it for. But if a company can get the contract started, then the possibility of receivable financing becomes available. Also known as factoring invoices, a business may get an advance today on an invoice that will be paid by a customer 30 – 40 days later. The benefit is the business can pay its bills now and continue to grow based on the creditworthiness of their customer, in this case the government.
The object is to think creatively about funding a business and to utilize the most efficient tool for each situation.
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