Waypoint Insurance - Risk & Business Magazine VIIC Fall 2015 | Page 24

Financing Growth

Financing Early Stage Growth for Entrepreneurs
BY: GREG CRABTREE, PARTNER, CRABTREE, ROWE & BERGER, PC

T

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.
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.
As we have focused our clients on
profitability first, their bank funding
needs have become minimal to nonexistent. 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
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.
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 customer’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 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 invoiceby-invoice basis. Each time you issue a
customer invoice, the factoring compan