Tuesday Team Talks № 17:
When does a Growing Business Need Additional Financing?
As part of our educational content series, this installment of the Tuesday Team Talks highlights various signs entrepreneurs should look out for when their growing business requires additional financing.
Business financing is a great mechanism for companies to maintain positive cash flow and refine their growth trajectory. Getting a loan often comes with the stigma that companies are facing a cash crunch or not doing well; when in reality, entrepreneurs often find that to fulfill certain business goals, additional strategic funding is necessary. Such cases would be for needs such as hiring a larger team, purchasing additional machinery, increasing marketing budgets, among others.
It is definitely not an easy decision to make and many break-even organizations avoid the hassles of additional funding and choose not to take on the hassle of obtaining additional funding and grow at sub-optimal rates. Uber is a perfect example of a growing, competitive organization that undergoes business financing multiple times a year.
So why would a phenomenally successful brand like Uber require additional financing?
Some portion of the money raised by Uber goes into marketing, driver payouts and ride subsidies to attract new customers and strengthen their network effects. Additionally, a large proportion of their funds raised is used to build their global expansion, competing head-on with brands like Lyft, Ola, Didi, Grab, etc. To date, they have raised 24.2B over 21 rounds of funding, averaging 3 rounds per year.
Every organization in various stages of their growth cycle will reach a point where business financing is relevant. As a business owner, how will you assess if your business requires funding?
Here are a few signs:
- Increasing Demand over Supply: If the demand for your product or service is larger than the supply of inventory or resources, then additional business financing can be used to purchase more inventory or hire a larger team to meet customer demands. This need could also be a seasonal requirement. Especially for retail businesses, the holiday seasons could be a time when it’s important to plan an inventory expansion.
- Decreasing Cash Flow: Managing cash flow is essential to any business. There are times when businesses have to deal with negative cash flows; this could be because of an unexpected emergency, an off-season, fluctuating business cycles or even a financial recession. Cash flow is an indicator of the viability of a business and it is important to infuse the right amount of capital to properly manage and sustain this cash flow.
- Business Infrastructure Expansion: Growing businesses need to spend wisely on infrastructure expansion. This could include renovating existing spaces, buying commercial space, building new facilities, buying additional equipment, or opening overseas locations. Obtaining business financing to fund expansion projects is a wise idea as it will ultimately lead to business growth and is a viable source of capital.
- Hiring: Hiring the right set of people can come at a cost -from recruitment advertising, hiring, paying wages, taxes & benefits to training them to become a productive member. Business financing is a good option to fund these hires as it requires upfront capital before gaining returns through productivity.
- Marketing and R&D: Most successful businesses invest in marketing and continues to do so through the business cycle to ensure increasing sales, branding and customer retention. Also, many organizations greatly invest in research and development to remain ‘innovative’ in the competitive industry landscape. Both these activities need an upfront investment in order to deliver long-term benefits in the future.
- Refinancing Business Debt: Refinancing or consolidating existing business loans is a critical step towards a company’s growth especially if it is difficult to make monthly payments due to the nature of the business. Refinancing can help in getting better, reasonable loan terms which can work towards the company’s advantage.
These are a few signs that suggest the need for additional business financing to fund the growth of a business. As important it is to realize the signs for this need, it is also important to choose the best funding option available to the business. There are a variety of financing choices and it is important to research and choose the best option to suit your business. Stay tuned and learn more about this in our upcoming blog posts.
The FintruX Team
About us: FintruX Network is the true P2P lending ecosystem built on the blockchain, powered by credit enhancements and no-code generation. The platform makes it easy for borrowers to connect with reputable lenders and servicing agencies, save money with competitive interest rates, and get an affordable loan within minutes in a fair and transparent process without collateral.
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