Starting your own business is a dream for many but one of the biggest obstacles is funding and keeping the business afloat during the growth phase. Ultimately, businesses can be funded by either equity, debt, or a mixture of both. Typically a business starts its journey with the founder providing the seed capital to get the business off the ground and enable the founder to complete their due diligence, feasibility, and the costly R&D that is often required to commercialize a product. This process can be lengthy and expensive with many founders needing to find a way to finance months or even years of runway.
Depending on the wealth of the founder, they may be able to continue to fund the growth of a business for a period of time before they require external funding. Ultimately, once a business takes off, the owner needs to consider what other options are available to continue to fund the business and other expenses like purchasing stock, and equipment, paying wages, and other suppliers and overheads. In essence, cash flow is needed to fuel growth for a start-up. For most businesses, they will need to consider
· Seeking debt
· Seeking additional equity
In New Zealand, the debt portion is usually provided by the banks who will traditionally leverage off a business owner's property (but that may have already helped to bootstrap the business initially). However, as banks have tightened access to funding, alternative providers are filling that gap. A mix of fixed asset funding for equipment purchases and growth expenses, together with working capital finance is one option. Invoice financing is another solution for start-up and scale-up businesses who want to harness the power of their unpaid invoices to fuel growth. Invoice financing is a great way for any business to release money from their invoices more quickly, improve cash flow or spend less time chasing late payments.
The benefits of invoice financing for small businesses include not having to leverage assets as invoices serve as collateral, much faster approval - which is important when you need to access cash flow, as well as ensuring you don't erode your equity stake too soon. In the FMCG industry, invoice financing can be particularly beneficial. As distribution grows across retailers and volume demands increase, many start-ups struggle to scale accordingly. By leveraging supplier contracts and invoices, invoice financing provides a way for businesses to meet their growth demands and take advantage of distribution opportunities by freeing up cash flow quickly.
While equity can be sourced via a range of private equity firms that have access to individuals with deep pockets there are some downsides. Not only do businesses need to demonstrate some growth to even secure funding but it can take a long time to find an investor. Combined with the fact that taking equity funds means diluting ownership, some founders are reluctant to take equity investment until they are ready. This is where a mix of debt, invoice financing and some equity could be a good split.
