The challenges of growth can destroy your business, especially if you lack the funds to support it. There are plenty of funding options out there to support or accelerate the growth of your business. The key is choosing one that fits the business’s needs.
1. Asset-based line of credit
Young companies have a shorter financial history when compared to well-established businesses, and often experience considerable growing pains. Banks see these young companies as unknowns as risks, so often the businesses will not qualify for traditional loans. However, fast-growing companies need cash to grow, so bankers put them on an asset-based line of credit.
An asset-based line of credit gives young companies access to additional working capital. Because their cash is generally tied-up in AR and inventory, banks will put a line of credit and collateralize it with the AR and inventory.
However, signing up for an asset-based line of credit doesn’t come cheap. Most companies don’t realize they may be required to conduct quarterly AR audits (which can be another $50,000 expense). These companies will also need to take into account the interest rates, loan fees, and more.
2. Venture Funding
VCs can help a young business grow faster. Companies that get backed by VCs experience a deep pool of benefits which includes access to their vast network of experienced professionals.
Venture capital is invested in a business in exchange for equity, diluting the founder’s ownership. Even if your business gets funding from VCs doesn’t guarantee your company will grow or flourish.
3. Angel Investors
Angel investors offer financial backing to startups and growing businesses. Since the money isn’t a loan, regardless of whether the business fails, there is no obligation to pay that money back.
Like VCs, angel investors are well-connected in the business community. They can bring years of expertise to a company, substantially improving the business’s chance for success and increasing growth.
Angel investors fund businesses in exchange for equity in the company or percentage of ownership. So for owners who want to maintain complete control over their business, finding an angel investor to back your business is probably not the best choice.
4. Initial Coin Offering (ICO)
A type of crowdfunding, ICOs are a way for startups and small businesses to raise capital using cryptocurrencies without giving away any equity to VCs or other outside investors.
Because anyone can initiate an initial coin offering, ICOs are a fast and easy way to generate financial support for a small business. Tokens (a digital asset like Bitcoin) can be customized. They can also be marketed to a broad audience who can learn about the ICO through the company’s website and social channels.
While ICOs sound like the funding option with the least risk to the owner, it’s important to note that nearly 50 percent of ICOs sold in 2017 have failed. Also, because countries vary in how they regulate cryptocurrencies, regulation is currently in a cycle of continuous, rapid change.
Not all businesses gain the interest of investors, so it’s the owner(s) who take on the full financial burden of the company. Bootstrapping uses the owner’s personal finances, or the revenue generated from the company’s day-to-day activities, to fund the business.
If you’re funding your business out of your own pocket, it’s critical to keep expenses low. Meaning, most of the work will need to be done internally. You may need to learn new skills and take on tasks outside your area of expertise to run the business.
While ultimately giving the business owner the most freedom, not only does bootstrapping place financial risk on the owner, it’s more complicated than it seems. It takes more than just funding for your business to survive.
Signature Analytics can work with your company to find the best resources and methods to help nurture and sustain your business’s growth. Find out how by requesting a free consultation today.