Finance has an integral part to play in a business. At a basic level, sufficient financing ensures that businesses have enough cash flow to maintain daily operations. This also assists in investment-related decisions, and facilitates smooth spending. A business’s ability to secure financing is essential for realizing tactical and strategic objectives.
Money greases the wheels of all businesses; it’s imperative that finances are carefully managed to ensure uninterrupted business activity, access to capital, and the ability to leverage opportunities as they arise. In an ideal world, businesses would generate sufficient revenue streams from sales of goods and services to cover costs. Businesses routinely face challenges in the marketplace, particularly with capital investments which require loans and other forms of financing.
The infancy stages of a business
Companies either succeed or they fail. What happens is largely dependent on a business’s ability to finance itself during the different stages of its life-cycle. There are typically 3 phases in a business life-cycle, notably the start-up phase, the growth phase, and the maturity phase. During the start-up phase of a business’s operations, financing comes from a variety of sources notably the owner/founder’s personal savings account, assistance from friends and family, small bank loans, and even credit cards.
If the business plan is ironclad, the business owner may be able to attract significant investment from angel investors, venture capitalists, and other sources of financing. For example, an entrepreneur may be willing to relinquish equity in the company for capital financing. This is a commonly used method by business owners who have a great business plan and investors who are eager to hitch their wagon to the business.
The growth phase of a business
During the growth phase of the business life-cycle, financing is equally important. Growth a.k.a. expansion necessitates significant investment in a business’s operations. Further, human resources are needed and this requires significant investment.
It is possible for businesses to tap into cash flow, but this precludes shareholders from taking dividends. External capital sources are essential during this phase of operations. Several options currently exist, including venture capital firms, but they can be detrimental to the owner’s equity and control over the company.
Fortunately, entrepreneurs who opt for this method of financing will receive a substantial advance upfront. Other options include bank loans. It is worth pointing out that interest can be deducted from all taxable income, meaning that debt-financed capital is inexpensive. If a business is listed on the stock exchange, the issuance of shares serves as an effective way to generate a stash of cash. A word of caution is advised: the business must be a proven performer.
During the growth phase, there is another method of generating financing, particularly for companies involved in selling high-end products including vehicles, machinery, equipment, luxury goods and the like. Unlike a convenience store cash business, luxury items or big-ticket items are typically paid off over time. Assuming an invoice value of $100,000 on day 0, a company may not want to ‘carry’ the customer’s debt obligation for several weeks or months.
An effective way to obtain financing during the growth phase and the mature phase of a business is invoice financing. This financing method is primarily geared towards B2B organizations where the terms are 30, 60, or 90 days in duration. Invoice financing is a product of the invoices that are due to be paid to a business.
It is highly effective at maintaining a stable cash flow. Invoice financing comprises multiple different products for financing accounts receivable. This typically takes the form of invoice factoring – a form of invoice financing. Assuming a company is owed $100,000, invoice factoring can ensure that 80% of that amount is paid upfront by the invoice factoring company ($80,000) and the balance is paid back over time (30, 60, or 90 days) less the factoring fee (for example 0.5% – 2%).
The reason why businesses use invoice financing is to boost cash flow immediately so that day-to-day operations can be taken care of and the business doesn’t run into a negative cash flow situation. Invoice financing isn’t that difficult to implement, provided the debtors are trustworthy and have an established and verified relationship with the SME.
The mature phase of a business
During the mature phase of a business’s life-cycle, it typically has a proven track record of performance. This means that it is likely a creditworthy business, and able to tap short-term capital loans and financing from a variety of sources. If the business has a healthy balance sheet and income statement, it is much easier to access capital from a variety of markets such as equities markets, capital markets, and bond markets.
Other forms of financing such as peer-to-peer financing and investment financing remain on the table. As a rule, you can expect the infancy stage of the business to be funded primarily by the owner, close friends and family. As the business grows, other financing options open up, including bank loans, business loans, non-bank lenders, angel investors, and invoice financing options too. Once a business has an established presence with credible clients, invoice financing is a particularly attractive option available to business owners.
