Growth can put an enormous strain on the cash flow of your business. Luckily, there are financing options available to you if you know where to look, enabling you to keep that growth on track.
One of the first things you notice when your business starts to grow is that your costs shoot up, while your profit doesn’t immediately follow. Growth can put an enormous strain on the cash flow of a company and business owners often make the mistake of financing growth from their cash flow — which is like using your credit card to finance your home renovations.
Doing things this way results in unnecessarily high financing rates and challenging repayment terms, which can also leave you vulnerable to a sudden cash flow crisis without the time required to line up financing. Financing business expansion requires planning, especially for fast growing companies.
When planning for fund raising, consider applying for sufficient funds to cover the cost of existing debt and the cost of the expansion. When it comes to business expansion funding, the total amount of the finance required will determine which finance options are most suitable.
If your finance requirements are relatively low and your cash flow history is good, consider a term loan or business overdraft to fund your growth while you work on increasing your sales to meet your growth expenses.
If your expansion needs include additional equipment or machinery, asset finance is available.
However, if your SME is growing rapidly and you want to enter new markets, scale your team or undertake new product development, look at longer term funding solutions.
Equity finance is the most common option for this kind of funding requirement and there are also government funds that cater for business expansion.
Government Funding Options
Government lending agencies provide a range of finance options for SMEs to foster growth in high priority sectors, specific geographic areas and to promote economic inclusion for previously disadvantaged people. The finance options include incentivised financing, cost sharing options, equity, loans and grants.
Government has partnered with Finfind, which has an up-to-date database of all the government funding offerings available to SMEs. If your business profile or funding need matches any of the government funds, Finfind will match you with the offering and provide you with the details of what is required to apply.
Equity finance refers to the sale of a percentage of ownership in your company in return for business expansion funds. One of the biggest benefits is that these lenders are often prepared to fund businesses that are not currently profitable, but have the potential to generate large returns.
As equity funders take more risk than traditional financiers, they expect a higher rate of return on their investment from businesses that can scale into large markets and show highly profitable future returns.
In the SME market, early-stage equity finance is usually provided by venture capital companies (VC), while mid-stage or larger expansion funding requirements for medium size enterprises are provided by private equity funds or bank loans.
VCs look for businesses with a strong founder, that have proven product market fit, a team to execute the business plan and a robust business model showing strong future returns. Funding amounts usually vary from R1 million to R20 million.
What Funders Want
Funding applications require preparation, including a detailed business model that outlines expansion plans and makes a compelling case for investment. CVs of key staff will be important as well as an organogram that shows the impact of the expansion on your team, detailed projected income and expenses, historical, audited financial statements, bank statements for the business’s bank account/s, tax clearance certificate, and personal statements of assets and liabilities for all owners as well as company and tax registration documentation.
Keep an electronic folder with this documentation and update it monthly so that you can access it whenever it is needed. If the initial funding meetings go well, the potential funder will perform a due diligence where the financials, the business model and its assumptions and projections will be scrutinised.
They may interview some customers and your key staff members. Funders are especially interested in the founder and team running the business, as they are responsible for ensuring that the projected growth is realised. They look for experience, deep knowledge of the industry and operational competence.
Finfind is SA’s leading access to finance solutions for SMEs. This revolutionary online platform links finance seekers with matching lenders, providing easy access to over 200 lenders and over 350 loan options. Finfind is supported by USAID and sponsored by the Department of Small Business Development.
Go to www.finfindeasy.co.za to find the business finance you need. It’s free and easy to use.
- Do your homework: Each equity fund has a clear investment strategy. Familiarise yourself before engaging.
- Educate yourself: Get to know the equity finance terminology and what to expect during the various stages of the deal process.
- Develop an exit strategy: This is a common question and an important issue for funders.
- Consider alternative funding: Can your expansion be funded with alternative or cheaper sources of finance that do not require giving up shares? Keep in mind, though, that the right investors bring more than money. They provide expertise and access to networks that can expedite your expansion plans.
Lastly, while you don’t always get the luxury of choice, do your best to partner with people you will enjoy working with, it can be a long marriage.