A growing business is cash hungry. One of the biggest challenges business owners face is that cash flow doesn’t always keep up with growth. The more sales you make, the more capital you need.
Growing businesses need capital to expand and survive. Larger businesses are generally more successful for longer. A company with 1-4 employees has a 69% survival rate over four years. For companies with 5-19 employees, the chances of survival increases to 78%.
If you want to hire new employees, purchase new equipment, or expand to multiple locations, you need growth finance to support your plans and cash flow needs.
What Is Growth Finance?
Growth finance is an umbrella term for the debt and equity funding sources a business can use to support expansion and growth. You can use growth financing to access the capital you need to take advantage of opportunities to grow your business and increase sales revenue.
A growth financing solution should be linked to the potential for growth and cash flow needs of the business. You may need to use a combination of short and long-term financing solutions from traditional and alternative lenders to support growth plans.
Key Considerations for Growth Financing
A documented growth strategy and financial plan are the first things you should focus on before seeking financing.
You need to establish:
- How much capital you need
- How quickly you need it
- Whether you need a one-off lump sum or continual access to credit
- When you will be able to repay the sum owed
It’s important to be realistic and accurate about the costs involved, how quickly you can achieve your goals, and when you will be able to repay the capital to the funding provider.
Create a Cashflow Forecast
A cash flow forecast can help you anticipate the amount of financing you will need and how repayments and costs will impact cash flow. It will show you what you can afford to invest without growth financing and how much working capital you need to keep your business operational over the coming months.
Plans for expansion and growth usually result in business costs increasing before sales and revenue catch up. It’s always recommended to include a surplus to pay for unexpected costs. Many growth plans take longer than initially expected to generate additional revenue.
Read our guide How to Create a Cash Flow Forecast for a detailed step guide on how to create a forecast for your business cash flow.
Calculate Return on Investment
Calculating return on investment (ROI) is essential for ensuring sustainable business growth.
When you’re considering growth financing, you need to account for the finance’s total costs and the percentage return on investment you can expect over a set period. Most businesses calculate growth financing ROI over a period of 3 – 5 years.
Establish the total investment cost, including any financing fees and interest, determine the increased revenue and net profit for each year, and use those figures to calculate your percentage ROI.
For example, let’s say that you are looking to introduce a new service. You need to purchase equipment, hire new staff, and invest in marketing to promote your new service to potential customers.
The total cost of investment, including financing repayments, is $300,000.
Once the new service is operational, you should generate an additional $450,000 in revenue and $75,000 net profit each year.
Over four years, the additional revenue and net profit will have paid for the total growth financing investment, and the business will start to see a positive ROI.
When you’re calculating ROI, it’s recommended that you use a range of sales revenue estimates to account for unexpected issues that could cause revenue to be lower than expected.
Growth Finance Options
Growth finance covers a wide range of funding options. Here’s a shortlist of the most widely used growth financing solutions in Australia.
1. Invoice Finance
Invoice Finance is a way to release the capital tied up in your outstanding sales invoices. If your business offers net payment terms, it can take up to 90 days to receive payment from your customers.
With an Invoice Finance facility, you can access up to 95% of the invoice value upfront as a cash advance.
Instead of taking on debt, Invoice Finance releases capital tied up in existing assets – your accounts receivables. It keeps cash flowing into the business so that you can invest in your growth plans.
Invoice Finance is particularly well-suited to growing businesses. Unlike a static business loan, the funding facility limit grows in line with your sales revenue. The faster your business grows and increases sales, the more capital you can access through Invoice Finance.
2. Asset Finance
Being able to access the right tools and equipment is integral to business growth. Around 30% of small business owners say that keeping up with advances in technology is a major concern.
The most significant challenge for businesses looking to invest in new tools and technologies is the lack of capital.
Asset Finance is a growth financing solution designed to help businesses access the funding they need to purchase equipment and machinery. Asset Finance options can include equipment finance, hire purchase, and leasing.
These solutions allow you to spread the cost of an asset over a more extended period, protect working capital, and access the technology and equipment you need to accelerate your growth plans.
Asset Finance works best when it supports new business growth. When new equipment helps you increase capacity and generate more revenue, the additional profits will cover the growth financing cost.
3. Equity Finance
The majority of growth finance solutions are types of debt financing. The lender will provide investment, and the business repays the principal and interest over a set period.
Equity finance is an alternative form of financing where a third-party funding provider invests in the business in exchange for part ownership and a share of future profits.
Equity finance is typically sourced through venture capitalist or angel investors.
Venture capitalists usually invest in innovative and disruptive start-ups that could achieve rapid growth and deliver a significant return on the investment for the venture capitalist’s clients.
Angel investors are also willing to invest in businesses with high growth potential, but they are usually private investors using their own funds. An angel investor can also provide valuable connections and advice to help the business succeed.
If you plan to pursue equity finance, you’ll need to create a compelling pitch to promote your business and be prepared to spend a lot of time networking and seeking potential investors.
4. Bank Financing
Bank financing solutions like loans and overdrafts are some of the most well-known growth finance options. But they can also be some of the most complex and challenging to access.
The flexibility offered by alternative funding solutions has made non-bank lenders increasingly popular. Since 2018, the use of non-bank funding for growth businesses has doubled.
Traditional lenders are generally more conservative and require applicants to meet strict lending criteria.
To qualify for a loan or overdraft, you will usually need to provide financial disclosures, a personal guarantee, and use your home as collateral. The application process is generally much longer than with alternative funding providers, and it can take up to 3 months for you to receive funding.
If you apply for bank financing, take time to explain your business model and try to choose a lender familiar with your industry. It’s vital that your bank understands the capital requirements needed to support growth.
5. Merchant Cash Advance
A merchant cash advance is a funding solution designed to help retailers and other businesses that process a high volume of card payments. The funding provider will analyse your card payment history and provide a cash advance based on the transaction volume value.
The cash advance is repaid as you process more credit and debit card sales. Every time a customer pays using a card, a percentage of the sales value is automatically deducted by the financing provider.
A merchant cash advance can be beneficial for certain businesses that suffer from seasonal sales cycles, but it can also be an expensive way to fund growth plans.
Read our guide, The Pros and Cons of a Merchant Cash Advance, to see if this growth financing type is right for your business.
Crowdfunding allows businesses to seek growth financing from multiple small investors instead of a single provider.
While this form of funding has grown in popularity, it can be challenging for businesses to raise enough capital to support their growth plans using crowdfunding alone.
If you have an exciting and innovative product or service that will appeal to a large audience, you can use online crowdfunding platforms to seek investors.
It’s important you understand the terms and conditions of the crowdfunding platform you choose to use. Some platforms require you to reach your full funding goal before you can withdraw the money raised, and withdrawals can also be subject to processing fees.
Which Growth Financing Option Is Right for Your Business
Growth financing can provide the capital you need to increase revenue and expand your business. Managing your funding sources and ensuring you can access capital when you need it is vital to sustainable business growth.
If you are looking to finance growth at your business, give us a call and speak on our friendly team of growth finance experts. We’ll help you understand your options and advise you on the best funding solution for your business’s unique needs.