FINANCING GROWTH
Financing
Growth
Financing Early Stage
Growth For Entrepreneurs
T
BY: GREG CRABTREE,
PARTNER, CRABTREE,
ROWE & BERGER, PC
he entrepreneurial conundrum:
you have a product or service
that the market really needs,
but how will you finance it?
For many, this is the hardest
hurdle to pass. Here are my recommended
sources of funding, ranked in order of best
outcomes. entrepreneurs have cash outside of the
business that they would rather keep
separate, and choose instead to borrow
funds inside of the business. You may
have your reasons, but I prefer you to
put the cash in as capital because I find
entrepreneurs to be far more careful with
their own cash than they are with debt. then collects your payment from your
customer and remits any remaining
balance less the factoring fees. Some of the
newer factoring arrangements allow you
to still maintain customer collection and
communication, which has traditionally
been a barrier for most companies to use a
factor.
PROFITS
Surprised this tops the list? Don’t be!
If you can get the current activity level
of your business to a 10%-15% level
of profitability, your business funds its
own growth. It generally means slower
growth in the early stages, but it builds a
commitment to profitability which then
bankrolls future opportunities. BANK LINE OF CREDIT
Lines of credit sound great, but if you did
not get profitable first, the bank is not
likely to give you one. Lines of credit are
essentially advances against a business
asset (i.e. Accounts Receivable) that are
shortly going to turn into cash. When
you draw against a line, it’s as if the bank
is paying your cust omer’s invoice and the
customer’s ultimate payment then goes to
pay the bank back. It works in theory, but
entrepreneurs have a tendency to just leave
a hefty unpaid balance on the line. The effective interest rate on factoring
is still higher than a traditional line of
credit, but I do like the invoice-by-invoice
discipline. Some of the newer factoring
arrangements charge a near-equivalent of
a merchant fee for credit card processing,
which makes it very attractive.
As we have focused our clients on
profitability first, their bank funding needs
have become minimal to non-existent.
Their challenge is now “what do I do with
my cash” instead of “where did the cash
go?” This approach requires one simple
rule: you leave all of the after-tax profits
in the business until the business has
more cash than it needs. We call this your
“Core Capital Target”- when you have two
months of operating expenses in cash with
nothing drawn on a line of credit.
Just like the top performing mutual fund,
if you reinvest your dividends by leaving
them in the business, you can make your
business your best performing asset!
YOUR OWN CASH
This may seem obvious, but many
The biggest trap to a line of credit is when
you draw on a line to fund business losses.
Since you can only repay debt with after-
tax profits, drawing on the line to fund
losses puts you in a death spiral. If you are
not disciplined, you will shortly max out
the line and be in workout mode with the
bank.
FACTORING
This has become an effective tool of
financing receivables on an invoice-
by-invoice basis. Each time you issue a
customer invoice, the factoring company
gives you an advance on the invoice
(around 95%). The factoring company
BANK TERM LOANS
A term loan is one that the bank makes you
repay over a fixed monthly payment. These
loans typically are based on an asset you
are purchasing. I like this type of debt if
the debt matches the useful life of the asset
being financed.
FRIENDS AND FAMILY
You can structure debt from friends and
family, but I do recommend that you
structure it no different than if you were
borrowing from a bank. If you treat the
paperwork casually, you are likely to treat
the terms casually as well. +
Greg Crabtree, Author of Simple Numbers,
Straight Talk, Big Profits, is a partner
at Crabtree, Rowe & Berger, PC, an
accounting firm focused solely on the needs
of entrepreneurs, helping them build the
economic engine of their businesses.
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