Steps to Growth Capital Fast Track

Financing Options

"We remained very flexible about sources of financing. Of course we looked at bank financing, angels and other venture capitalists. But we also looked to suppliers for terms that would help... it's all financing."*

Your business expansion will likely tap into all three major sources of financing:

• conventional external lenders (e.g. mortgages, operating lines of credit);
  
• internal sources of working capital (e.g. improved cash flow, reduced inventory, better terms from suppliers); and
  
• external risk capital investors.

External risk capital investors, who will invest by purchasing equity shares, include:

• angel investors;
  
• venture capital firms;
  
• institutional investors;
  
• labour-sponsored venture funds; and
  
• some government corporations.

Cost, Control and Risk

"Of course, I want to hold on to as much of the company as I can, but I'm willing to sell shares...I'd rather have 60% of a very large company than 100% of a small one."*

Risk capital sources will finance businesses that conventional sources won't touch. Risk capitalists will assume some of the risk of growth. But they'll only do so for a price — in financial return and in control.

When you consider different types of financing, the key questions are:

• How much will it cost?
  
• How much control will I have to give up?
  
• How much risk will I be exposed to?

Cost

Risk capital equity investment is:

• more expensive for the entrepreneur than debt financing (because the investor expects a high rate of return), but
  
• generally has a low cash cost for the company (because the investor will usually hold the equity for a number of years and then sell the shares in the marketplace).

Control

Equity financing involves a loss of control since equity investors will:

• be buying a portion of the company when they purchase shares;
  
• likely demand a presence on the board of directors; and
  
• probably want to be involved in management and decision making.

Not all entrepreneurs are ready to dilute their ownership — are you? Before you answer, consider that in many cases the investor's active involvement can be an important resource, providing management experience, industry contacts and other benefits.

Risk

When you take on debt, you're adding risk because you're committed to scheduled interest and principal payments. On the other hand, if you accept equity investment, the investor assumes some of your financial risk. At the same time, you assume another type of risk — the risk of losing too much control (e.g. selling too large a percentage of the company shares).

Action Items

Use our Financing Options Checklist to help you see how well you're doing in this area.

* All quotations used with permission of Chris Griffiths, Griffiths Guitars International, St. John's, Newfoundland, Canada.

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