Looking for ways to continue business growth? From utilizing investors to business refinancing, Fifth Third Bank offers 3 ways to fuel business growth.
For business leaders and founders, there are few things more thrilling than watching your company’s growth take off. You’ve found the right product-market fit, your customers are returning, and you’re finding new ones every day. But as with everything in entrepreneurship, even the best-case scenarios present challenges.
In this case, growth costs money. You need to increase staff to handle the growing business. You may need to pre-order supplies or build out new technology. And the big catch: Many of these needs will arise before you receive payment from your new customers.
So how do you fund your company’s growth, in a way that makes sense for your business and your future? There’s no single answer. Instead, consider the pro and cons of the following funding options and how they fit in with your business model, current financials and growth potential.
1. Raise Money from Investors
The rise of startup culture can suggest that when companies need money, investors—in the form of angel funds or venture capital—are the way to go. The reality is that only about 6% of companies raise money from outside investors. Still, investor capital can be a great option for the right type of company.
The key point to remember is that investors will want some form of return on their money. That means in addition to accelerating the company’s revenue, you need to have an exit plan for how you’ll provide a return on the investment. This usually happens via a company sale, or in rare cases, a public offering. For this reason, fundraising typically makes the most sense for fast-growing companies that are scaling a product and have a viable exit opportunity. It's less of an option for entrepreneurs who are building companies that they'd like to keep—or that are traditionally acquired by other companies.
Raising money from investors allows you to:
- Obtain growth capital without taking on debt.
- Acquire a larger amount of money at an early stage than is usually possible via a loan or other types of financing,
- Add the expertise and connections of your investors, both of which can help a company grow.
A Few Considerations
Before you head down a fundraising path, consider:
- This option is really only available to companies with a scalable product, which is most often in technology.
- Investors become owners in your company and have a say in its direction and your decisions.
- Once the investment is received, company leaders need to be working toward an eventual exit—usually within five to eight years.
2. Finance Your Company’s Growth
Borrowing is one of the most common ways to fuel company growth. Forty-three percent of business owners applied for a bank loan in 2018. You can use multiple financing vehicles to structure the debt, from a traditional bank loan to a line of credit to even a credit card. As with your personal debt, business financing comes with defined terms for when you need to repay the loan and how much interest the lender will charge.
The process for obtaining a loan is relatively straightforward: Business owners typically meet with a banker, discuss the options, and fill out an application. The lender will review your company’s credit (and oftentimes your credit as well), examine your books, and perform other due diligence to determine whether your business qualifies. In general, it’s much more difficult for startups and early-stage companies to obtain a loan if they don’t already have revenue or credit history. Financing growth is usually a better option for more mature organizations that have demonstrated a means for repaying the debt.
Borrowing provides some distinct advantages, including:
- Your lender doesn’t receive any ownership in the company, nor do they have a vote in business decisions.
- Depending on the type of loan, the amount may be flexible and allow you to tap into debt to finance large orders or opportunities as well as capital growth expenses such as new facilities.
- The interest you pay on the loan is tax-deductible.
A Few Considerations
If you are considering financing your growth, consider that:
- For smaller, riskier companies, lenders may ask you to use your personal assets as collateral.
- The repayments are a known expense and they’re due, even if your revenue dips.
3. Bootstrapping Your Growth
If you can’t qualify for a loan, and fundraising doesn’t make sense, then you could bootstrap your company’s growth. That means you don’t rely on outside capital to grow—instead, using revenue or your personal savings. This requires a bit of creativity and may slow the growth of your company as you look for ways to continue to self-finance. But if you find a way to grow and stay profitable, then in many cases, you may be pleased that you didn’t take on investors or borrow money.
Entrepreneurs fund their company growth with little or no capital often by paring down their expenses—they find innovative ways to do more with less. For instance, you might create a partnership with another company that allows you to share equipment or resources. Crowdfunding offers a unique way to raise capital that may fill in the gaps of your bootstrapped strategy. With traditional crowdfunding (not equity crowdfunding), you don’t take on debt or investors. Instead, you raise money for your business with an ask of your supporters and often a promise in return (maybe first dibs on a product, for example).
Bootstrapping is a challenge, but one that can pay off in many ways, including:
- You end up with no debt, investors or other vested interests to manage.
- The approach demands that you find a sustainable business model, one that works for now and in the future.
A Few Considerations
If bootstrapping is your strategy, consider that:
- Without capital, you may miss big growth opportunities such as fulfilling an order with a new customer.
- You can face challenges and even go out of business if you don’t find ways to meet your expenses while you’re building revenue.
Building a business is a puzzle, and there's no one way to put it together. Entrepreneurs may use one of the strategies above—or a combination of all of them—to finance a growing company. Take the time to understand the ins and outs of all your options, so that you can find the capital that makes the most sense for your business and ensure that you have the funds you need to be successful.
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