They either fail within a few years or they get acquired by larger businesses. Either way, your entrepreneurial business needs financing to continue operating and moving through the life cycle.
What are the typical sources of finance for each phase of the entrepreneurial company life cycle?
#1 Start-up phase financing
At the start up stage finances come from personal savings, credit cards, loans from friends and family, trade credit from suppliers and perhaps a small bank loan. If however you or your management team has a strong reputation in business you can attract capital from business angels or even a venture capital.
#2 Growth Phase Financing
To expand your business you need more sales and more customers. Expansion requires investment in operations, recruitment and training of new staff etc. Initially this capital can come from your positive cash flows, provided you do not take dividends. But if you need to grow strong or you want to build brand visibility, you must tap into external capital.
• First point of contact is your local bank for loans, and when your business outgrows the landing capacity of your local bank, you move to a large money-center bank. Debt is one of the lowest-cost sources of external capital because the interest is deductible from the taxable income. Pay attention at your debt ratio and your debt-to-equity ratio, though. The higher these ratios, the higher the returns, but higher the risks.
• If your business is however in a “hot” industry or it is close to a breakthrough and about to launch a game-changing product, it may attract the attention of a venture capital firm. This is the most expensive form of capital, because the Venture Capitalists will take a significant share of your company and its future prospects. This form of capital, unlike many other however, comes with business advice.
• To tap the broader equity market – that is to launch an initial public offering of shares; your business must be large enough or proven. This type of financing helps you round up a large bundle of money. This can dilute the ownership interest of the early investors and you. You select the investment bank, they help you comply with the regulatory recruitments of issuing shares to the public and they give you access to potential investors: individual investors, mutual funds, pension funds, private money managers.
#3 Maturity Phase Financing
Assuming your business has reached this stage and the company is credit worthy, for short-term needs, you can get a loan from a bank or other financial institution, such as insurance company or pension fund. To get a better deal from the lenders use your cash flow or existing assets. Another source of finance can be a sale and a leaseback arrangement.
A healthy, mature company also enjoys access to public capital, bonds and shares. Timing is very important here though, sell bonds when the interest rates are low and sell shares when the share price is high.
Nowadays, there are other forms of financing you can use to meet your business needs. To explore this further please visit MarketInvoice, Crowdfunding, Peer2Peer Finance Association etc, and check out the government schemes too, such as The British Business Bank. This is a new way of connecting investors with businesses who need them and diversifying risk and yield.
To sum up, start-up money generally come from the founder’s pocket, growth is financed by internally generated cash and perhaps a modest bank loan, then by private sale of ownership shares, eventually in some cases by the sale of shares to the public.
Bibi Martin from BM Interim Management
With over 10 years of experience in an SME environment, Bibi has been able to make a long-term positive difference in the professional lives of a number of entrepreneurs, business owners and senior decision makers by designing and delivering change programmes and expansion initiatives profitably. Bibi is described as an enthusiastic, authentic leader with a refreshing approach to delivering excellence in change, with ability to demystify complex concepts and make them practical.
Bibi has a practical, live an interactive way of management training which is above all solutions focused.