When it comes to running a company, you and I both know revenue is King.
Without it, you have no company.
It’s impossible to hire team members to leverage your time and make your product or service better.
When you have a more seasoned company with high profit margins with consistent revenue and savings to cover overheads for 6 or months in advance, seizing opportunities is easier.
Check out my article on Financial Management for a better understanding of how you can manage companies’ finances.
But what if you’re leading a startup or want to launch a new product line and you don’t have the capital to do it properly?
Well, say hello to financing and investment.
When done properly, financing and investment can take your company to the next level
So today I want to share with you the what, when, and why of financing and investment so you can equip your company with the capital it needs to go to the moon…
We’ll be covering:
- Why a company should source investment or financing.
- The data around financing and investing.
- The difference between financing and investing.
- When should a growing company source investment?
- Seeing it in action.
- The best source of funding for you.
- Feelings and beliefs around finance & investing.
- Action steps to source financing and investing.
- The next steps…
Why Should A Company Source Investment Or Financing?
Businesses can require funding for a multitude of reasons.
Reasons can include:
- Working capital to buy machinery.
- To hire more staff.
- To fund a venture.
- To refinance existing loans.
Below I’m going to walk you through 5 main reasons why a company may seek financing or investment so you can start to ponder whether it’s something your company could benefit from.
Sufficient working capital is a key aspect of any company’s financial health, and not having enough working capital can have a serious impact on the future of your business.
Many businesses choose to apply for external funding to create enough working capital to enable them to fulfil their growth ambitions.
A loan can cover short-term funding requirements while giving the business the money it needs to grow, or can bridge the gap between customer orders and supplier payments to help the company meet its funding obligations.
Growing your business and increasing sales often requires you to purchase assets such as new machinery or vehicles.
While you may have enough cash to cover working capital expenses for your company, you may look for a loan to cover the purchase of new assets to enable your business to expand.
An asset funding loan is a great way to spread the costs of acquiring an expensive new asset. Fixed monthly repayments and loan terms from 6 months to 5 years can help you plan your cash flow in advance.
Starting A New Business Or Venture
New businesses that are still in the startup stage will need funding to get off the ground, and good cash flow is essential to a small business.
While most directors will use their own funds to start the business, very few manage to entirely self-fund the company to profitability, and will therefore have to seek external funding.
There are a variety of options for external startup funding, including bank loans, borrowing from family and friends, equity investment from a business angel, crowdfunding, and funding grants.
If you’re looking to grow your business to take it to the next level, you may very well need funding that enables you to execute on your business plans. Whether you want to increase sales, expand your range of products or services, move into new premises, hire more staff, or expand internationally, a loan for growth finance can help.
If you need to restructure your company’s debt, a loan that consolidates your borrowings and reduces costs can make your finances more manageable for your business.
A loan to restructure your existing debt can make financial planning easier by reducing the number of monthly repayments you have to keep track of, and could potentially reduce your total monthly repayments. Refinancing your existing company debt can help your company grow by freeing up cash in your business for working capital and expansion.
The Data On Financing & Investing
Now we have a bit more of an idea on the reasons behind seeking financing or investment, let’s look at the data around it.
A survey published in 2019 found that 44% of SME businesses sought some form of external funding in the previous three years.
The Difference Between Financing & Investing
Financing and investment are both very different but designed to do the same thing. Bring money into an organization.
Financing is the act of obtaining money through borrowing, earnings or investment from outside sources.
Investing is the act of obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
Let’s take a look at the different types of financing and investment and how they can be used to grow your company.
Borrowing money is the most straightforward way to finance a business. Borrowed money can come from a range of sources, including banks and credit unions, or family and friends.
Obtaining money from investors is a more complicated form of business finance. Investment capital can come from venture capitalists or angel investors, who are likely to demand an ownership stake in the business, a good deal of managerial control and an agreement to buy back the investor’s share at a premium in the future.
Saving profits for a period of time can allow a business to raise debt-free capital with no strings attached.
Saving a portion of profit in retained earnings over time can take longer than obtaining a loan or investment, however, possibly causing you to miss time-sensitive opportunities.
For such goals as gradual, continual growth, however, financing through earned income can be the safest and most cost-efficient means of raising money.
One type of investment is the purchase of real property.
Productive equipment like;
These pieces of equipment can directly influence the quality of a company’s output. Buildings and land provide the space a company needs to grow and use those pieces of equipment effectively.
Purchasing investment products is fundamentally different from investing in productive and real property. Investment products such as stocks, bonds, annuities, CDs and other interest-bearing accounts can help a company to grow its wealth outside of its normal business activities.
Real property and estate can also be used for investment purposes and sold at a profit.
The Different Types Of Financing
To raise capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing. Most companies use a combination of debt and equity financing, but there are some distinct advantages to both.
Principal among them is that equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing on the other hand does not require giving up a portion of ownership.
Companies usually have a choice as to whether to seek debt or equity financing. The choice often depends upon which source of funding is most easily accessible for the company, its cash flow, and how important maintaining control of the company is to its principal owners. The debt-to-equity-ratio shows how much of a company’s financing is proportionately provided by debt and equity.
Equity financing involves selling a portion of a company’s equity in return for capital. For example, the owner of Company ABC might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for capital. That investor now owns 10% of the company and has a voice in all business decisions going forward.
The main advantage of equity financing is that there is no obligation to repay the money acquired through it. Of course, a company’s owners want it to be successful and provide the equity investors with a good return on their investment, but without required payments or interest charges, as is the case with debt financing.
Debt financing involves the borrowing of money and paying it back with interest. The most common form of debt financing is a loan.
Debt financing sometimes comes with restrictions on the company’s activities that may prevent it from taking advantage of opportunities outside the realm of its core business.
Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.
The advantages of debt financing are numerous. First, the lender has no control over your business. Once you pay the loan back, your relationship with the financier ends.
Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.
When Should A Growing Company Source Financing & Investment?
So far we’ve covered the reasons why you’d want to look at generating capital for your company but when is it the right time for you to start taking action?
Well, it starts with an analysis of your growth projection.
How do you predict your company growing based on the current state of the industry you’re in and how your competitors have grown and continue to grow?
The chances are, if you have other areas of your company aligned you can expect similar growth rates to them.
From there, you should look at the challenges from a cash perspective you may experience as you continue to grow your company.
For example, outgrowing your current facility and needing a bigger one could eb a potential challenge.
Especially if your working capital is tied up in buying stock ahead of time.
You could be in quite the predicament.
Do I stop buying stock and temporarily stop producing so I can acquire a larger facility and more equipment or do I stay stuck at the current revenue ceiling?
This is when investment and funding is really powerful. It allows you to get the funds you need to progress into the next stage of your company’s growth without interrupting your current operational output.
Investment & Funding In Action
I recently read ‘Shoe Dog’, the inspiring memoir of Nike founder Phil Knight.
It was founded in 1964 as Blue Ribbon Sports by Bill Bowerman, a track-and-field coach at the University of Oregon, and his former student Phil Knight. They opened their first retail outlet in 1966 and launched the Nike brand shoe in 1972.
The company was renamed Nike, Inc., in 1978 and went public two years later.
Throughout Nike’s early stages of growth, Phil used the power of financial funding to continually grow Nike into the 30.44 Billion dollar company we see today.
So how did Phil actually do it?
How did he take Nike from a 2 man band selling Japanese shoes out of his basement to the brand you see today?
Well, the first financial funding he sourced was from himself and his business partner Bill Bowerman. They both put $500 into the company all the way back in 1964 and this is how most businesses start.
After that, Phil sourced funding from his family.
He’d reached a sticking point where the company was ready to grow but revenue was all tied up in the stock he was yet to sell.
If he wanted to place a bigger order of Japanese shoes it had to be done before his current stock was sold so it arrived in time and continued to meet the demand of his market.
So, he asked his father for money. He said no…
So he asked his mother. She said yes.
This was the first external financial support Phil acquired and set the tone for what was to come.
This strategy of borrowing money to buy more stock which was then paid back in the following months was a strategy Phil used for years as a way of funding the company’s growth.
The problem was it meant his company ran very close to the line.
One fall through of stock delivery or refusal from the bank to fund the next stock replenishment meant Nike was at a constant risk of bankruptcy.
They lived on something called the float.
Borrowing from banks to buy stock.
Selling the stock through multiple vendors and affiliates.
Collecting the profit from those vendors and then paying back the bank.
By 1970, to keep the company growing at his current rate a $1 million loan was needed. This was an enormous amount of money for the time, so rather than comply, his bank told him his credit was maxed out. The company couldn’t even afford the $20,000 cost of shipment for the new order from Japan.
Knight decided the best course of action was a small capital raise.
It was decided that Blue Ribbon would sell 20% at $2 a share in order to raise $300,000. One month after the offering, they had only sold 300 shares. And these were mostly to family and friends. At that point, the offer was withdrawn.
Things were so bleak at that time, that at one point, Knight was forced to accept the last $8,000 one of his employee’s parents had saved, just to keep the company afloat.
After finding another small line of credit at the Bank of California, Knight began talks with the Nissho Iwan Company, a Japanese trading company then doing more than $100 billion in sales annually. Nissho dealt in huge volumes, on loan, on margin, and loved growth companies with big upsides.
For them, Blue Ribbon was a goldmine. It all seemed perfect.
Better still, Nissho was willing to take a second position to the banks on Blue Ribbon’s loans.
Now that it appeared Nissho would make a good business partner, Knight had to lay down some ground rules. Knight told them they would never receive equity in the company. Ever. Nissho agreed, but wanted a 4% mark-up off the top, and market interest rates after that.
The deal was reached and soon Nissho paid off Blue Ribbon’s loan from the Bank of California in full. They also told the bank they would no longer do business with them at either of their locations as a result of the way they had treated Blue Ribbon in prior years.
They then found Blue Ribbon a new bank that promptly opened a $1 million line of credit for them.
With sales from 1979 over $70 million, the day had come for a public offering. This was an idea Knight had always been against because he never wanted to lose control of his company. But he needed the money. In order to alleviate both concerns, it was decided that they would issue two classes of stock: Class A, and Class B. Publicly available Class B stocks would receive one vote per share. Class A stocks were to be held by founders and early investors who would name ¾ of the board of directors.
This would allow the company to raise enormous sums of money, turbo charging its growth, all while allowing Knight to retain control. It was decided that Nike would offer 20 million shares of Class A stock and 30 million shares of Class b. Of the 50 million shares, nearly 30 million would be held in reserve.
That left 2 million Class B stocks to be sold to the public. The remaining 17 million Class A shares would be held by the insiders. This amount equaled 56% of the company. 46% of which would be held by Knight.
The number was high but needed to be that way in order for the company to be run by a single voice.
Over the next 10 days, Knight and the team crisscrossed the country doing a dog-and-pony show for potential investors. They visited 12 cities in those 10 days. It was soon after that the price of the shares needed to be decided. Knight insisted on $22 per share. It was at the high end, but he rationalized it by saying there was another company going public that same week who was demanding $22 a share as well. And his company was better.
That company was Apple.
Knight received his price.
The next day when the markets closed, Knight alone was worth $178 million. The IPO was so successful that even the $8,000 investment his employee’s parents had put in years ago was worth $1.6 million.
Feelings & Beliefs Around Funding & Investment
- I’m afraid if I acquire investment that I’d let the investors down if I fail
- I’m frustrated with our lack of available capital
- I’m confused how I source funding and investment for my company
- I’m reluctant to give control of my company to an investor
- I feel uncomfortable owing money to investors and banks
Let’s go through the feelings and beliefs you can adopt to elevate your relationship with financing and investing.
- I feel confident that with the right investment, I can take my company to the next level
- I’m content with our need for funding
- I feel aligned with the people investing in my company
- I’m eager to get investment so I can take our company forward
- I feel comfortable borrowing money and understand it’s a part of building a successful company
Aligned and Bold Actions
Now we have gone through the limiting beliefs and feelings you may want to let go of and the empowering ones you can embrace, let’s look at the action steps you can take to elevate your company’s financial health
ACTION STEP 1] Decide what form of investment or financing works for you
No two companies are the same so it’s important for you to analyse the current position your business is in so you can confidently review the potential ways of acquiring capital.
Once you know your current position and the available options you can make a decision that is in the best interest of your company.
ACTION STEP 2] Find the right investors
Whether you’re crowdfunding or leaning towards private investment, choosing the right investors can make or break your company.
Choosing the right investor for your company is influenced primarily by the stage of business you are in.
This article walks you through the different investment options you have depending on the stage your company is at.
This article explains the funding options you have available depending on your business growth plans and current position.
ACTION STEP 3] Outline the terms
Once you’ve decided the best form of funding for your company, this website provides some helpful information and templates to help you raise funding as well as explaining the more complex options.
One of our CEO clients Katharina Sophia Volz (Dr), founder and CEO of Occamz Razor had this to say about her time working with Lifestyle Perfected:
“In the shortest amount of time, I was able to restructure my team, raise funding and make the right product decisions. He consistently manages to make me look at any complex and difficult situation I present to him in a different light, with helps me tremendously in navigating through the often complex circumstances CEOs face. ”
If you’d like a complimentary consultation on your funding strategy or another area of life & business to elevate the alignment within your company, reply to this email or alternatively, you can see our programs for CEOs and for teams here.
We’re also excited to invite you to apply to CEO Circle. A group for CEOs to elevate emotional intelligence, increase impact and legacy wealth. If you are CEO and/or a founder with $1 million or more in revenue or assets apply here.
Sending you love,
& the Lifestyle Perfected team