Business growth strategy and finding the right financing route

Being an entrepreneur is incredibly rewarding and whether you want to build an empire to last the ages or simply be master of your own career, starting your own business is a highly attractive option for people who have the drive and enthusiasm to create something from scratch. Even at the best of times, it can be challenging, so the advice in this series looks at the considerations new entrepreneurs need to bear in mind when they approach their new venture. 

Funding a fruitful business: a focused strategy  

Keep the (cash)flow and manage your finances well  

Avoid the temptation to run your cashflow to the limit. Cashflow is important for any business – but most crucially for a new one, where cash constraints can become a serious restriction to achieving growth. For these purposes, you need to be strategic and carefully develop your cashflow forecast. Monitor and revise this forecast closely, by the day, and acknowledge that there will be ups and downs, delays, and disasters. Be generous with your budget – when in doubt, over-budget – to cushion yourself as much as possible against any shortfalls; anticipate your financing needs in case you need to arrange for further funding and retain keen oversight and control of any debts.  

Profits – which are what you are left with after you dispose of something over what it cost to acquire, convert and sell – will only increase if you: a) increase revenue relative to costs, or b) decrease costs relative to revenue. Where the opposite occurs, profitability will decrease, and if this happens for long enough, your capital will be eroded to the point of insolvency. As products or services age, their profit margins get smaller, and so taking the time to analyse market conditions and adapt is critical.   

Raise capital in a way that’s right for your business 

There are broadly three ways you can fund a new business – Grants, Debt and Equity 

• Grants – Grants, while often conditional, are usually non-repayable.  
• Debt – Taking on debt by way of a loan or credit is a repayable form of raising capital. By taking on debt, a business raises initial capital which is to be paid back over time or at a specific later date, and usually with added interest.  A significant benefit is that, as long as your cashflow can support the repayments, you don’t have to part with any of your business and have minimal restraints on the way you run it. The terms of a loan bear careful scrutiny, since they may also carry some form of guarantee or other onerous terms, so be sure to take advice as appropriate. 
• Equity - Allotting shares in your business doesn’t bring with it a scheduled repayment obligation or interest, but instead involves giving up a portion of your business. This means that not only do you have to account for profits to the co-owners of your business, but you also hand over a measure of control and, on a sale of the business, you will end up sharing a proportionate amount of the proceeds of sale with your co-owners. Protecting yourself via shareholder agreements can help you retain control (as well as other protections), while benefitting from the flexibility that equity fund-raising brings. 

Deciding how to raise capital for your business is therefore a decision which requires careful thought and, ideally, a clear funding strategy: A growing business will often have several funding rounds, especially if it has an increasing valuation. Whichever route you take, you need to carefully consider the implications, which may be more or less suited to your business as it develops.  

About the author 

Jaan is an experienced commercial lawyer with over two decades of experience in his field, specialising in the full range of private corporate work including mergers, acquisitions, MBOs and joint ventures. His experience spans both sides of coin, having once been an entrepreneur himself, and with an MBA from Oxford. 

Jaan and the Commercial Team at Vardags offer substantial expertise and outstanding strategic solutions on company and commercial legal issues, advising clients from entrepreneurs and SMEs to private multinational corporations. Included within the team are Reputation and Privacy specialists Alex McCready, Gregory Monk, Tessa McKeown and Eva Wallace, alongside leading litigator Frank Ryan, who can deal with any litigious or reputation-based matters which may be involved in your case. 

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