Know when and what type of debt is best to help accelerate your business growth.
Growing your business almost always involves using debt, so don’t assume that business debt is automatically a sign of bad management. In many cases it’s a clear signal of savvy business practice, especially when that money helps to boost your growth.
Even the largest companies in the world have debt – sometimes quite substantial debt – yet they still have many millions in cash and savings. Debt allows them to expand, while their cash on hand provides security that they can pay their bills even if things turn sour.
The same principle applies to your business, no matter what stage of the business life cycle you’re in. In this blog, we’ll go through the types of financing most appropriate at the following stages: launch and start-up, growth and expansion, maturity and exit.
Funding your business at the start-up phase
Starting out is the riskiest phase for your business, no matter how well you’ve planned. You might face expenses or difficulties you hadn’t expected, and this could derail even the best-laid plans. This fact usually makes it very difficult to get funding through traditional channels like a loan from the bank.
The risk is simply too high when your business has no track record and may not even be generating cash flow yet. For maybe a year or more, you’ll have to rely on other sources of finance. The most common is your savings.
Ideally, you want enough money put away to pay your living expenses for a while, because a salary is a true luxury when you first start a business. Not receiving a salary to pay for the first 6 to 12 months is one way to pump more money into growing your business.
At this early stage, it’s also common to lean on friends and family – either to lend you start-up money, or to buy a small share in the business by investing an agreed amount.
But the best way to get money as a start-up is to make sales. Paying customers are not only a sign of demand for your product or service, but they’re also the best source of cash for your business.
Once you’ve built up a track record of sales and profit and are achieving regular, expected, predictable turnover – from tender awards, secured contracts, etc. – you can look to move your business into the next phase.
You can also find more hints and tips about business funding through various stages at SimplyBiz, powered by Nedbank, with free access to a business pitch deck to gather your thoughts and motivation for a funding request. Be sure to post your pitchdeck on the platform for protentional funders to find you too. The SimplyBiz funding wizard further offers a guide to navigating traditional and alternate funding requirements.
Funding your growth and expansion phase
Having guided your business through its early years, you’ll eventually get to a stage where actively growing your business is the next natural step.
Your capital needs when your business is growing will depend on many factors. A manufacturer, for instance, will need more money to invest in equipment, while a services business would have higher monthly running costs tied up in paying salaries.
As you can imagine, these costs cannot be covered by simply raising a few thousand rand from family and friends. You need to get serious financing at this stage. You could approach your bank for a business loan, or other forms of credit appropriate to your needs.
Bank products for small businesses range from credit cards and overdraft facilities to term loans and vehicle or property finance. If you’re in the retail sector, you could make use of specialised funding like Gap Access, offering an advance of between R30 000 and R1.5 million, depending on your business’s turnover, with repayment terms linked directly to your card turnover.
Once you get into real business expansion phase, then you could be attractive to specialised financiers like hedge funds, venture capital investors and private equity firms. Your business would need to be substantial in size already and be poised for growth to be fuelled by these investors.
Funding your mature business
If you’ve managed to grow your fledgling start-up into a business of enough size and influence, you then enter a world of high finance. For most of us, this will demand a lifetime of hard work before reaping the full rewards.
A typical route to follow would be to list your company on a stock exchange. This means that the shares you own in the business acquire tangible value. It also means that you can hand over the reins to a relative to continue the family tradition.
If you’ve made the right choice, your future will be secure because your shares will become more valuable. You can then sit back and enjoy the rewards of your many years of hard work.