Money to your business is like fuel in your car’s gas tank. It will help keep everything moving forward without interrupting your journey! In an ideal world we’d like our business to be totally self sufficient but like our cars, at some point you’ll need to fill the tank. I remember the big “sucking noise” my first business made regarding money. I poured everything I personally had into it and didn’t really think about financing it any other way. Looking back now, I probably could have gone further and created more value before I sold my business if I had had more money to invest in it.
Think about it. How long would it take you to create $1 million working on a shoestring budget? Would it happen sooner if you had an extra $50,000-$100,000 to invest in creating that million dollars?
If you’re like most entrepreneurs, you started your business with limited resources and continue to re-invest what you earn back into your business. This “bootstrapping” is a great way to test your market, create early revenue and begin establishing yourself in your industry. It may or may not be the best long term strategy however and you may be wondering when and if you should think about outside financing.
There are plenty of resources out there and educating yourself about what’s available and what would work best for you will help to alleviate any fears and concerns you may have.
1. Create a financing plan from day one
Much like having a sales and marketing plan in place to help you create revenue, a financing plan will help you understand when an infusion of cash will be necessary and where it will come from thus allowing you to plan ahead. The most difficult time to actually go through the process of financing is when you really NEED it. You may not be thinking as clearly as you should be, feel too vulnerable or even feel that time is not on your side. Even when you’ve chosen to self-fund initially, it’s better to plan early when you actually don’t need the money—or may never need it— so that you have options in place you can take advantage of when the time is right. This includes establishing lines of business credit, developing a network of potential investors, etc.
2. You’re having a growth spurt and you can’t keep up with the demand
You may have experienced steady growth for awhile but now you find your demand is starting to exceed your capacity. Congratulations by the way! You’re growing and that’s a great thing but it may feel like a double edged sword because you can’t work fast enough to create inventory or deliver the service but you don’t want to slow down the momentum that’s been created. This is a good time to have available cash on hand to invest in inventory, new systems, and scaling your operations. You would benefit from short term cash or credit financing options which don’t require you to give up part of your company and that allow you to make gradual payments from your increasing revenue.
3. Out of steam and still not over the hump
You may still be working to get your business off the ground but you don’t have enough money to really get it launched. I would focus on creating a very simple revenue milestone and focus on achieving it. The resources you DO have should be focused on creating revenue and not invested in non-essential activities. Build your team with barter, short term volunteers or offer performance based compensation (they make money when you make money.) Consider short term financing, credit lines, crowdfunding, corporate sponsors and other strategies to help you achieve that first big revenue milestone. Now that you’ve proven your business model and you have more experience and confidence, consider longer term financing to help you get to that next stage.
4. GREAT idea but it will take a couple of years to get into revenue
Your business model requires research, development, and a significant buildout before you’ll really start seeing revenue. In this instance I would say go as far as you can go with your own resources to develop and protect the idea, validate your market and perhaps create a prototype. Bring it to life as much as possible. When you’ve taken it as far as you can take it, consider bringing on a long term financing partner(s) who will own a small percentage of the company. There won’t be pressure to pay them back immediately and they will work with you as long as it takes to create success. This is also a good time to consider licensing your idea and allow a better funded and more established company develop it and pay you a royalty. The point is, the risks are greater at this stage plus you’ll need time to develop it so short time financing options wouldn’t be appropriate at this stage.
5. There’s revenue but no profit at the end of the month
This is a common challenge for more established businesses. The thinking and practices that got you to this point may not be supporting your growth. You may think you need money to make more money but you could probably benefit from be a “profit makeover” first. Before you commit to bringing in outside resources, see how you can create more automation, streamline services, lower costs while still providing value and increasing revenue working with what you DO have in place. You primarily want your new financing to be focused on creating growth, with a very small amount committed to fixing what’s not working. Don’t throw good money at a broken plan! As an established business, you’ll have MANY financing options to choose from. Choose the most competitive rates as well and offers that allow you to maintain control of your company.
6. Planning for a major expansion
It might be time to expand your business and include real estate, or build out a license or franchise model. All of these activities require an infusion of cash. Instead of using your own cash reserves for this expansion, it may be in your best interest to consider outside financing that just focuses on these events. For instance, we may bring in a real estate investor to specifically help a company acquire a building or presell franchises to franchisees to help fund the rest of the company’s expansion.
REMEMBER: Focus the resources you DO have on developing your market and creating revenue as soon as possible but always plan ahead for financing to help build the rest. Setting these intentions will help you manifest the money at the most perfect time instead of feeling stuck and “needy” for it. ~Maria Simone