Small businesses are the backbone of America, with anywhere from 50-90% depending on the survey using external sources to either grow or sustain their operations. Growth financing has become more and more popular as time goes on and with online resources making it easier than ever to get an entrepreneur funding package together in just a few hours instead of the weeks or months that were common in years past.
What is growth financing?
Growth financing is the process of obtaining the necessary funds to finance a company’s growth. This can include obtaining new debt or equity financing or refinancing existing debt or equity. It may also involve the sale of assets. Lenders are often most concerned with the borrower’s ability to repay a loan or secure additional credit because this directly relates to creating wealth in the form of new assets. The ability to access financing is a critical component of any business plan. The process of raising capital through debt or equity financing is often best suited for established businesses with a track record of strong financial performance.
Internal or external growth financing?
Internal growth financing is a type of financing used by a company to finance its growth. Growth financing is also known as self-directed growth or seed financing, and it can come from many sources. A company can seek out professional lenders to provide it with external growth financing, but it also has the option of creating and distributing its stock shares to investors. When a company goes through external growth financing, its capital structure will be fixed, with limited upside potential.
What are the benefits of growth financing?
Growth financing is a type of financing used to help a company grow its business. This type of financing can be used to support a company expand its operations, hiring new employees, and purchase new equipment. It can also be used to cover short-term cash flow issues. As mentioned above, a term sheet is a nonbinding agreement that indicates the key points of an eventual contract between two parties. This document does not detail all of the terms and conditions involved in a deal, but it provides a good indication of both parties’ expectations. The specifics of a term sheet are laid out in a binding term sheet or Letter of Intent.
What are the types of growth financing?
There are various types of growth financing that a company can use to grow its business. Some of these include issuing new equity, taking on debt, and selling assets. Others involve roping off sections of the company and assigning them to new managers with more experience who can grow the business. Sales hiring is on the rise and could continue to climb as companies accelerate their hiring efforts to take advantage of an economic recovery that, so far, has been kinder to sales than manufacturing or research and development (R&D).
How do you qualify for growth financing?
Small businesses can qualify for growth financing in a few different ways. One way is to show steady growth in sales and profits over time. Another way is to have a good credit score and collateral to offer. If your credit score is above 600 and you have a sizable down payment and mortgage insurance, then you might get away with not making a monthly payment for a few months. If you can’t afford the down payment and have poor credit, you need first to improve your credit score and financial position. A better way is to build up an inventory of cars, trucks, or motorcycles you can quickly liquidate if you fall behind on payments.
What are the risks associated with growth financing?
The risks associated with growth finance are many and varied. One of the biggest dangers is that a company may take on too much debt to grow, leading to financial instability if things go wrong. There is also the risk that the company may not be able to repay the debt or that the loan terms may be unfavorable. Additionally, there is the risk that the company may not be able to generate enough revenue to cover the debt costs.
Things you should keep in your Mind
- What is the most significant danger of taking on too much debt?
- What are the risks of not being able to repay the debt?
- What are the risks of the terms of the loan being unfavorable?
- What are the risks of not generating enough revenue to cover the costs of the debt?
When is growth financing not the right choice?
When a company is not yet generating revenue, it may be challenging to secure growth financing from a lender. Growth financing is typically used to help a company expand its operations. Still, a company that is not yet generating revenue may not demonstrate that it can use the additional capital to grow. Thus, even if the company has a good idea and solid business plans, it may not execute those plans without additional funding.
What are the steps to obtaining growth financing?
There are a few key steps to obtaining growth financing for your business. The first step is to identify the specific need for growth capital and use it. Once you have a clear plan, you can begin to research the various types of growth financing available. After you have narrowed down your options, you can start to reach out to potential lenders or investors.
Conclusion
Growth financing is a type of financing designed to help high-growth businesses grow even more. There are various growth finance options available, and each one has its benefits and drawbacks. It is essential to carefully consider all of your options before choosing a growth finance option.
