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Growing manufacturers have a dilemma – taking on big orders can mean a surge in growth, massive revenue, and access to next-tier customers. On the flip side, filling those orders requires heavy up-front investment in materials, overhead and staffing costs.
There’s a gap here and it’s existed since the beginning of the manufacturing industry. Traditionally, access to funds has almost exclusively relied on traditional banking systems. For a growing business, accessing the level of funding necessary to smoothly facilitate growth can seem like an impossible task.
Technology companies are constantly innovating to allow business owners the opportunity to take control of cash flow, and more business owners are accessing unsecured funds to grow their operations. Even without big business funds, small business owners can now manage cash flow as if they are a huge brand. Here’s how.
Financing for company growth
Securing affordable financing for your business is the first step in ramping up production. Some owners have access to funds from elsewhere—friends and family, savings or another source. However, most product producers will need to look outside for a considerable amount of capital to cover the initial overhead costs of taking production from 1,000 units a week to 20,000. Many owners make a choice between financing their business using debt financing or equity financing.
Debt Financing
Debt financing for a small businesses will be familiar to anyone who’s made a large personal purchase using a loan. Capital is given up front for the promise of repayment with interest over a fixed term. Borrowing using a traditional term loan involves a structured payback schedule, interest, collateral, and is sometimes accompanied by covenants on how and when the borrowed funds are to be used (ie. cash meant for an equipment purchase cannot be used on a new storefront sign – no matter how nifty it looks).
For an entrepreneur with a growing business, debt can feel rigid or inflexible. However, debt can be a preferable option to finance your business’s growth because once the loan is repaid, you will still own 100% of your stake in the business and the interest paid on debt is tax-deductible.
That being said, to qualify for debt financing, you will generally need to have been in business for at least 2-5 years, and have sales records in the realm of $500k to $1 million. 58% of business owners with young businesses (0-2 years old) report difficulty in accessing debt financing, where only 38% of mature businesses encounter barriers to obtaining credit.
Equity Financing
Using equity financing, a small business trades a number of its ownership shares in exchange for capital. Canadians are familiar with equity financing thanks to watching entrepreneurs negotiate deals with a row of fire-breathing venture capitalists on the CBC. Many venture capital investors will specialize in either an industry, a stage of growth, or both—it’s up to borrowers to network with the right investors for their business.
Equity financing may pose a challenge for your long-term return on investment; you have a new partner with voting rights who may have a different direction in mind for your company. Many venture investors only care to fund growth-type businesses, since the biggest return is in the payout after acquisition or IPO. If you entered this business because you love the work and have no desire of ever going public, you’re going to have a hard time compelling an equity investor to lend without a payout incentive. However, equity financing can be easier to obtain than debt financing for smaller businesses.
Invoice Financing
Invoice financing is an attractive alternative for many small business owners. Invoice financing allows a business owner to fund unpaid invoices without waiting on payment, for a small fee (which is generally a percentage of the invoice value). This is attractive to small or new business owners because invoice financing firms generally assess the credit-worthiness of invoices based on the business you are selling to, rather than your sales or business history.
This is why invoice financing is often used by small business owners to scale their businesses to a point where they can qualify for larger debt or equity financing deals, or in cases where they cannot wait on 30-90 day payments terms to operate their business optimally.
The most successful businesses grow by using smart funding options. Think carefully about what will work for you on both a personal and professional level with regards to business ownership and accruing debt, and make use of all of your available resources in a smart way.
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