With some hard work, tenacity, and smart finance decisions, your scrappy startup or purchased business can become a growing, mature or aging business--the entrepreneur's dream.
Reaching any of these stages doesn't necessarily guarantee life on Easy Street, but it often means:
- sufficient stability in operations, resulting in few cash flow problems
- ample internally generated funds from sales and investments to fund many business needs
and most importantly:
- more financing options available thanks to your business' operating history, established value, credit history and availability of inventory and accounts receivable financing
While securing financing for any business venture is never a walk in the park, mature and growing businesses have many more options to choose from.
Growing and Mature Businesses
As the owner of a growing or mature business, when you tell financiers you're planning to expand, they're much more ready to listen.
In addition to the appealing benefits listed above, you also have the advantages of:
- established customers and suppliers,
- efficient internal operating procedures,
- more sophisticated marketing and advertising,
- realistic long-term business plans
- and the company's emerging (or evident) goodwill.
All of these coalesce to improve the creditworthiness and investor appeal of the business, making debt financing and equity financing more attainable.
Debt Financing Considerations
You'll find debt financing becomes easier to locate as your business' track record supports creditworthiness. If your business has been profitable, debt financing is generally the preferred form of raising new capital for your existing business--or businesses.
Certain growing businesses, however, may be stifled by inadequate capital for expansion that stems from the reluctance to dilute ownership through equity financing.
Equity Financing Options
When considering equity financing, sometimes the decision simply comes down to two points:
- whether you want a profitable, growing business in which you share control and can cash out your interest at a given time,
- or whether you own a business that fails because you could not raise sufficient capital for the business to grow.
While those options may seem like a blunt false dichotomy, growing businesses can consider raising equity capital through:
Financial Traps to Avoid
While debt or equity financing may be more readily available for your prosperous growing or aging business, it may not be the panacea for current business woes.
Simply put, money is never the answer to overextending your business or poor decision-making. More specifically, more money won't help if you:
- rush expansion or acquisitions,
- purchase too many expensive fixed assets or
- form unwise associations with other businesses.
To avoid these traps, realize your limitations. Seasoned entrepreneurs engage professionals to assist in legal and business matters when they know they're in over their head. Remember that you're the visionary for your business. Employing experienced management to handle the growing complexities of the daily operations can be another investment in ensuring your business' success.
The vast majority of entrepreneurs never own an aging business because:
An aging business is characterized by a conservative philosophy aimed at maintaining the business's internal bureaucracy and its market status quo.
While most entrepreneurs are known for their desire to keep growing, some small business owners reach the point where their innovation and creativity are limited to tinkering with current products and existing markets. Investment into new product lines and emerging markets represents a financial risk that owners unwilling to assume. Aging businesses tend to be cash-rich because less investment is being undertaken.
At a certain point, these entrepreneurs are ready to trade in their pricing models and PowerPoint presentations for palm trees and pina coladas. To transition from business owner to beach bum, you'll need to know the financial aspects of selling your business and retirement planning.
Appeal: Nothing Sells Like Success
Every small business owner is convinced that the enterprise will be successful and that investors can be persuaded by these convictions. And for very good reason: When you strike it on your own, you have to believe in yourself, especially when non one else is.
And after you've proved it with years of success, respect among your business peers and an aging business, you will find it all come full circle as you, once again, need financing to sell your business. And, once again, you'll need to provide objective evidence that your business will succeed.
Every potential lender or investor will look at how the injection of their cash will:
- be used in the day-to-day operations and expansion of the business,
- will either be repaid and or result in a profitable return
Many of these questions may be answered by data contained in your business's financial statements and projections; however, lenders and investors also make more subjective evaluations of you and your company. These assessments may affect your financing requests even more than the objective numbers.
Additional evidence of future success for your business can sometimes take the form of:
- contract commitments from existing or prospective customers,
- industry or professional opinions
- and market research — even if it's informal testimonials.
In your business plan or loan application, make sure to note any:
- advantageous market trends
- consumer appeal
- management experience
- retention of skilled employees and
- availability of any special resources, such as a valuable patent
Identifying a lender whose strategic approach or special industry focus matches your business will also enhance the subjective appeal of your business.
Making the Case for Selling Your Business
Convincing someone to invest in your business when you're selling it vs. when you're ramping up involves one major difference: you. You're no longer at the helm to ensure continued success of your enterprise, so your tactics for seeking funding for selling your business must adapt to this reality.
When you make your case that your business is a worthy investment, keep in mind that most lenders and investors are followers, not leaders like you. The best evidence of a good investment will be your prior success in raising capital and how the business is designed to succeed without your continued presence.
A financier wants to spread risk as much as possible, and a certain comfort level may be reached if other investors have a significant vested economic interest in your business. If you can show a strong financial commitment to the business from additional investors, as well as a meaningful personal investment by the business owners, the appeal of your company will correspondingly increase. Your past business experiences, your expertise, and your managerial skills likewise play a crucial factor in determining the appeal of your business.
As a general rule of thumb, most lenders will expect owners to have an equity investment of at least 25 percent of the total cost of the business.
If you can establish a personal relationship with a particular financier, such as a local community banker, your past successes and business experience are more likely to be considered in determining the likely future success of your business without you. Use your personal resume, as well as letters of reference from community professionals and business persons, to help project yourself as a reputable, reliable, and creative business person who's turning over a solid business with great potential.
And now that you have getting financing down pat, no matter what stage of the business life cycle your company is in, you can delve into what every small business owner must know: estimating the money you need to succeed.