Titus Maccius Plautus, a Roman poet and philosopher is credited as the person behind the popular quote “You have to spend money to make money”. In many respects, it holds true in business because growth costs money.
Growth may take the form of more staff which translates to higher payroll expenses, more office space as a result of a larger team, which of course means more operational expenses.
Funding growth can be a chicken and egg problem where in order to achieve growth you need to have access to cash and in order to get more cash, you need your business to grow.
So where do successful businesses fund their growth? In other words, how do businesses finance their growth plans?
Business financing refers to the various ways in which a business can raise money to fund its operations and growth.
Common methods of business financing include:
- bank loans
- venture capital
- angel investors, and
- initial public offerings (IPOs).
Business loans (sometimes referred to as bank loans)
Business loans are a common form of business financing. They can be used to finance the purchase of assets, such as equipment or property, or to cover operational costs.
Bank loans typically have fixed interest rates and repayment terms. This makes them one of the most common and safest avenues of seeking additional financing for business growth. There are also other variants of business loans such as a line of credit, an overdraft facility, or a secured bank loan (you can learn more about these types of business loans here).
Most commercial banks offer some form of business loan making them available to all qualifying businesses and out of this list, a bank loan is going to be the most practical option for most of you.
Venture capital (VC) is another source of additional funds. Venture capitalists invest money in businesses with high growth potential in exchange for an ownership stake in the company.
Venture capital can be a powerful tool for businesses, but it is also very risky. This is because the investors may want a large return on their investment, which can put pressure on the company to perform well. The company may also have to give up equity in the business, which can dilute the ownership structure and control of the business. In addition, VCs may have a lot of experience and knowledge in a particular industry, which can make it difficult for the company to compete if it is not in that industry.
In order for a VC to give you money, you will need to pitch them. This article on Harvard Business Review offers some insight into how VCs assess pitches.
The Sharks such as Mark Cuban and Kevin O’Leary on the television series Shark Tank serve as VCs. And in Australia, Blackbird Ventures, a VC firm, is well-known for investing in Canva, RedBubble, and SafetyCulture.
You may also come across the term ‘private equity’ (or PE). Technically speaking, venture capital is a form of private equity, however, risk appetites and growth expectations are what separates the two where private equity investors prefer stable companies whereas venture capitalists look for the next potential unicorn.
Angel investors are individuals who invest their own money in businesses. They typically provide funding in the early stages of a company’s development, when it is most risky. In exchange for their investment, angel investors typically receive a minority ownership stake in the company.
Even celebrities are getting into angel investors and according to this article by Amy Lamare published on Celebrity Net Worth, Serena William, Ashton Kutcher, Jay-Z, Carmelo Anthony, and Snoop Dogg are the most active celebrity angel investors.
But seeking investment from a celebrity is going to be an impossible task for most people. Luckily, there are websites and groups dedicated to solving this exact problem.
Furthermore, it is very difficult to get an angel investor. This is because angel investors take time to carry out due diligence. So even if you are not ready to attract funding, it is never too early to start making connections with them.
Initial public offerings (IPOs) are when a company sells shares of stock to the public for the first time. IPOs are a way for businesses to raise large amounts of money, but they are also very risky and costly to undertake. The value of a company’s stock can fluctuate greatly after an IPO, and there is no guarantee that the stock will be worth anything at all.