Capital Raising: Think About "Why" You Need This Extra Capital
Updated: May 31, 2021
At some point along a business journey, perhaps you need extra capital.
Photo by Edu Lauton on Unsplash
Cash is the fuel to a business - 82% of businesses failed due to cash flow issues.
Before you rush and decide to raise capital, thinking it is the solution to all your cash flow issues, stop for a second.
Think about why you need this extra cash. If you don't understand why, you may enter into a financing deal that can hurt your business in the long term.
Sometimes you have internal issues within the business - once you fix the problems, your business generates the extra cash. Or second, it gives you confirmation that obtaining outside capital is the best choice.
Third-party financing solution comes in many forms, and matching the reason for financing to the right solution can save future problems.
Extra capital doesn't always mean equity and venture capital.
It might mean talking to your bank about agreeing to an overdraft extension or taking out a business loan from a business financing provider.
It may even mean looking at specialist finance products, such as asset finance (for buying new equipment), invoice financing (for quickly raising cash from your outstanding invoices), government-backed grants and tax incentives, or even reward crowdfunding.
Whatever financing route you take, it's essential to understand the impact this extra capital will have on your business and your longer-term success.
You want to think about how this extra cash then benefits the growth, scaling up, and (eventually) the end sale value of the business.
Consider these 4 reasons why you need the extra capital before you start the process:
Boosts your working capital.
Financing gives you the liquid cash needed to stabilize and expand your operations. With enhanced working capital, you can overcome your post-pandemic cash worries and get your balance sheet looking healthy once again.
You can also take on new work, projects, and customers, safe knowing that you can cover the initial expenditure while waiting for new revenue streams to bear fruit.
Provides investment in your growth strategy.
If you're looking to expand your operations or scale up the business, extra funding gives you the capital to invest in this growth. You have the means to take on more people, invest in equipment, plant, and new technology, and scale up your business's overall capacity.
Strengthens your company's balance sheet.
Additional financing in the company helps increase your assets, which, in turn, helps to boost your working capital and liquid cash, enhance your asset performance, and improve your capitalization structure as a viable business.
On the other side of assets, don't forget that any debt financing also increases your liabilities (the debts you owe other people) and equity financing increases your shareholders' equity.
There are pros and cons to either type of financing. Hence, it's essential to understand the story of balance sheets pre and post-financing before you enter into any financing agreement.
Makes your company more valuable.
Sometimes with more cash in the bank and more capital to draw on, your company becomes a more valuable and more attractive proposition in the marketplace.
This healthy financial position is invaluable when approaching lenders for more financing to buy out a competitor, or even when selling the business and bringing your exit strategy into play as the owner.
Whatever the next stage is for your business, the journey will be easier with a robust, tailored financing strategy behind your business plan.
If you need the extra cash, we can help you create a meaningful financing strategy, which doesn't always mean getting it from third-party business finance. Talk to us about creating a tailored financing strategy.