Five Ways to Use Other People's Money to Finance Your Growth Look beyond bank loans, and friends and family
Opinions expressed by Entrepreneur contributors are their own.
You're reading Entrepreneur Asia Pacific, an international franchise of Entrepreneur Media.
Finding money for growth is a big challenge for companies trying to scale. Most chief executives use their own money to fund growth, that is, sell a piece of property, borrow from themselves, or reinvest earnings. But if the market opportunity is big or you want to accelerate growth, more money may be needed than you yourself can provide.
The other option is to use "other people's money". It may be as simple as going to individuals (friends or family) or a bank, providing a business plan, identifying how much money you need, negotiating the interest rate and discussing a repayment schedule. Depending on your credit history, the size of the loan, and how well the individual or bank knows you, you may have to provide collateral, e.g., security for your loan such as your home, property or a certificate of deposit, and agree to regular reports detailing your progress and use of funds. If you have good character, collateral, a sound business plan, and look like you will be able to pay back the interest and loan, you stand a good chance of getting the money you need.
Here are five additional sources of funding you can use to grow your business.
Both state and federal governments offer several kinds of "grants", which are essentially funds you don't have to pay back. Some grants support the hiring, training and development of employees. Others are focused on product development, accelerating technology commercialization, support upgrades to manufacturing facilities, or facilitate exporting. Some countries have specific grants for indigenous people who want to start a business. In Malaysia, there are several grants for small business, as well as a Young Entrepreneur Fund. Australia lists grants by sector and location, while Singapore has a Business Grants Portal that companies can apply through.
The advantage of getting a grant is that you don't need to pay it back or give up equity. But you will need a strong business plan that specifies how the funds will be used, and what outcomes you expect to achieve. And remember, this is not "free money". It is an investment that the taxpayers in your state or country are making in your company, so work hard to deliver the outcomes you have specified in the grant application.
Vendor or Landlord Financing
Rather than outlaying money for capital expenses, you may want to consider vendor financing to secure the capital equipment you need. One company leased a certain number of trucks each year, which they branded, drove for a year or two, and then turned in for new ones. Leasing rather than buying saved them money, helped them manage cash flow, and reduced the downtime associated with break-downs. Likewise, rather than buying or constructing your own building, consider working with a builder to build to your specs in return for signing a long-term lease.
If you have a disruptive idea, your company has high growth potential and a fast-moving market opportunity, you may want to consider equity funding. "Angel investors" are people who invest their own money in exchange for a percentage of equity or ownership. Angels are generally the first equity investors and make a "seed" investment.
Venture capitalists often invest funds secured from pension, insurance or retirement funds, and come in after the seed round of equity financing. Choose your investors carefully, expect them to want to have a say in major decisions, and remember that each time you sell equity, you dilute your percentage of ownership. On the other hand, a smaller per cent of a company that grows large is better than 100 per cent of a small company that never grows, or grows very slowly. The good news is that if the company fails, then you, the angels and venture capitalists, share the loss, and no one expects you to pay them back for the funds that were invested.
Note that fewer than one per cent of all companies in the US are venture funded, and once you take other people's money in exchange for equity in your company, the clock is ticking. They want their money back, plus a multiple of 3x to 10x, so your company will either need to "go public" through an IPO or be sold in a trade sale.
Go the Initial Public Offering (IPO) Way
A small number of growth companies, usually those with a disruptive technology, choose to "go public" and list on the stock exchange within their country of origin. This enables their shares to be available to a much larger number of people (the general public). In effect, it's a way for a large number of people to "share the risk" of funding the continuing growth of the company, and eventually enables the founders to take some money off the table as well.
Merging or Selling
Another way to fund growth is to merge with another company or sell a portion of your company to a larger company. A larger organization will have more money, staff, systems, marketing reach and customers, which can enable the smaller company to grow more quickly and with fewer growing pains.
There is no single, right way to fund growth, and whatever options you choose will likely depend on your company, its structure and market potential. But using "other people's money" can enable you to grow more quickly than bootstrapping or funding it yourself. And getting the right kind of money, from the right kind of people who support your growth, can enable you to capitalize on market opportunities, accelerate growth, and increase your odds of beating competitors.