Every growing business needs working capital and that may mean raising funds to cash flow growth.
Knowing what capital you need to expand is one thing, your propensity to handle risk is another BUT where you acquire the cash for working capital to fund growth is another.
There obviously is more than one source. The textbooks will tell you of the three main sources of fundraising.
Sell equity – often seen as the big boy option, but the one that will likely cost you the most in the long-term, if you consider the long-term increased value of your asset.
Crowdfunding – although potentially will mean you sell less equity also falls under this category.
Asset-based finance – invoice discounting, factoring and releasing the value of your debtors are the examples here.
Bank borrowing – which is what I want to focus on for a moment
Do you see your bank as simply another supplier? … You should…
Some entrepreneurs can feel intimidated by their bank. Banks can appear on one hand to want to help you, but they don’t support you when you need them most. (I’ve personally fallen foul of that situation!).
It can help to remember…
Their product – is money
YOU are their customer
They are your supplier
And to quote my previous business partner Lara …. “you should sell your Granny before you sell your equity and banks remain the cheapest money in town”
Buying money comes with contractual terms just as any other contractual agreement would – and you should never sign anything you are not comfortable with.
Like any investor or supplier they want to reduce their risk – so communicate often, don’t hide when things don’t go to plan AND ensure you put in place the finance you need long before you need it – the worst time to raise capital is when you are already in the proverbial.
They will always claim to support the needs of growing businesses but the reality today is that they can’t afford to employ the brightest stars, and the majority of people who choose to work for a bank do so because they haven’t the entrepreneurial spirit or courage to set up their own enterprise – so will never understand the pressure of payroll – they just won’t.
So, if you are intimidated by your bank … STOP!
Martyn Dawes, the founder of Coffee Nation and author of ‘Wake up and sell the coffee’ who spoke at one of our events last year, happens to be a flying enthusiast. He commented on how sad it was that none of the UK aircraft manufacturers has any debt on their balance sheets – as it means they are not raising capital to invest in growth.
So, in summary, be prepared to leverage other people’s money and make friends with your bank.
P.S. If you read Lara’s book – More Balls Than Most, you’ll know that she financed the growth of Pacific Direct through a combination of Factoring and Bank Finance, which meant she retained 99% of her equity when she came to exit.