An established business that is planning to grow its volumes invariably requires cash to finance its expansion. Given the fact that there are hardly any companies that have recorded a rapid increase in sales using their own funds, it is important to develop a strategy to secure money from external sources.
Experienced entrepreneurs know that the challenges in raising funds are many. Here are some guidelines that you can follow to make the exercise simpler.
Don’t limit yourself to a single source of finance
A Harvard Business Review article titled How to Finance the Scale-Up of Your Company by Daniel Isenberg and Daniel Lawton suggests that entrepreneurs should use multiple financing options instead of taking money only from venture capital funds or angel investors.
They should finance their growth using banks, public funds, customers, suppliers, and employees who are willing to buy into the company’s stock. This method will not only be faster but will provide a cushion in case any single source of finance does not work out.
Bank finance can be helpful in several ways
Bank finance is low-cost but is notoriously difficult to raise. But every growing business should approach their banker for funds.
If you are successful, you will save a substantial amount in interest costs. Additionally, your ability to pass the stringent credit norms that will be applied prior to granting you a loan approval will give other lenders the confidence to advance money to you.
Conserve extra cash
When your business is doing well and your liquidity position is comfortable, it is a good idea to build up your cash reserves. Writing in Entrepreneur.com, Zach Cutler advises business owners to “stash extra cash.”
Unfortunately, many companies have a habit of spending more when times are good. Instead, entrepreneurs should control expenses even when the economy is booming. A cash reserve will help you ride out the downturn. Raising money from external sources at that time can be very difficult.
In addition to allowing daily expenses to mount unchecked when you are flush with cash, there is another mistake that entrepreneurs make. At these times, companies often go in for acquisitions at inflated prices. If you buy a business for more than it is worth, you risk the new unit becoming financially unviable when the economic cycle changes direction.
Any major financial decision should be taken only after giving it great thought and considering all its implications.
Don’t use the same approach with all your lenders
Say, your presentation to the venture capital company was well received and got you the funds that you had asked for. You would think that you can use the same presentation with your other lenders. Don’t make this mistake.
Your bankers will be looking for an entirely different set of projections. Instead of wanting to know your future market share, they are more interested in whether you will have the ability to pay your loan interest and principal in a timely manner.
Similarly, the state economic development agency that is considering your company for a loan wants to know how many new jobs you will generate.
Remember to tailor your loan application to the requirement of the lender.
Get sound advice
An article in Forbes points out the importance of having access to guidance and help from someone who is an expert on financial matters. It could be your CFO or a consultant.
Also, remember to keep your financial plan flexible. Take advantage of every opportunity to raise funds as long as it helps you to reduce interest costs and boost your bottom line.
Above all, begin your search for funds well before you need the cash. This will give you the time to find a lender who offers the lowest costs as well as the most beneficial terms.
Ravinder Kapur is a business operations writer at Aepiphanni, a small business operations and strategy consultancy that exists to help small business owners CREATE | DESIGN | BUILD extraordinary businesses. He is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry for more than 30 years. His finance expertise includes the commercial vehicle, automotive, and construction equipment sectors, as well as corporate finance. His experience in these disciplines has included business development, credit analysis, risk management and financial recovery. In addition, he worked extensively in corporate finance recoveries and was involved in several large value arbitration cases.
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