Recently CurrentCo grew and we needed to fund that growth. And while we are a profitable enterprise, all companies that grow need some type of growth capital. In fact Inc magazine has an interesting article called "The Company That Grew Too Fast." I've heard these stories before and I've had personal knowledge of companies that couldn't meet payroll because a client promised to pay quick, but ended up paying slow. In fact we were in such a bind recently, and I had to come up with $100K to cover expenses from a mortgage line of credit. Lucky it was only for 8-10 days, but if I didn't have it available we would be in trouble. So I started looking around and asking banks how to fund things like receivables. And mostly what I got was a "you're not big enough" and "you're too much of a risk" answer. It took a while but our attorney eventually lead us to a bank that deals with start-ups and after we switch banks from our existing vendor, created a secure CD and equipment lease, and spent several months depositing our revenue (like clockwork), the bank finally gave us access to their structured financing department.
And boy did I feel privileged. They looked at my business, understood the quality of our cash flows, and created a customized proposal to fund operations ... significantly fund operations, albeit collateralized by our high quality receivables.
Then I started looking at the fine print. The bank's rate ... we'll let's just say that if I fund the company with credit cards I'll be paying less in interest. Of course the problem is that I don't have any where near available in credit as the bank is willing to offer. And this is the business's receivable line so it will build up the business credit. But the terms are quite heavy and expensive and in the end it may be a questionable deal ... the problem is ...
How can a young company grow without having to pay very high fees? I'm sure Microsoft, Dell, and all the big players had this problem ... that's one of the reasons they went public (not the only one obviously). But they were growing at such a fast pace that their financing options were very different from a small company growing at 65%-100% per year. Still a good clip, but not the wunderkind type of company.
What is a good growth company to do when it needs expansion capital? And how can you get it without paying too much?
Well I haven't found the perfect solution yet. And yes, I did take the revolving credit line. However, the terms are such that I don't have to use the line if it is not necessary (I still pay a hefty setup fee), and so I will try to make sure that I won't use it. Actually this is a typical problem in a first year MBA course (and yes we had this exact problem as a homework assignment).
The answer is simple ... well at least the academic answer is simple ... stop growing so fast. That means focus on accumulating cash to fund operations and don't outstrip your internal ability to have a bunch of cash for when you grow.
That works well in the text books. But my business is based around a few large customers. And when I win one of those customers I can't turn my back because the competition will grab them, and it may be years before I'll have the chance to get back in and re-win. And each new elephant customer can add 20%-75% to the top line. So, stop growing so fast works in text books, but not in real life (imagine telling Google, Dell or Microsoft to stop growing so fast).
My answer is four-fold
1.) Go out and start securing financing now for your needs 12+ months from now. You are going to get raked over the coals. You are a small business and unless you are the next Dell, or you have a great VC behind you who can push financing sources around, you will be viewed as a high risk and although you are the one most in need of cheap financing you will be the last one to get it. I know it's not fair, but that's the way of the world ... deal with it.
Start talking to banks, finance companies, debt originators, angels, etc. You probably will find that they are interested in talking to you if you have a realistic need for financing that will be collateralized with high quality customer orders. But that is the key. Don't just go out and try to find a $1MM line of credit secured against your good word. It won't work. Find out from your resources (accountant, attorney, consultants) who will start to work with you to build secured financing. Then start the process and be prepared to walk away several times because I am sure you will get some terrible proposal (both expensive and onerous) at the beginning. And it is going to take quite some time before you get what you need. Don't wait until the last minute. Last minute shopping is always much more expensive and this is definitely a place where you want to comparison shop.
2.) Keep expanding margins. This is something that unless you are trained in business you probably think you are doing but are not. Most entrepreneurs I've met look at revenue, and at operations, but rarely can tell me what their gross and net operating margins are on a monthly basis, by product line and by customer type.
But margins are where you are going to get the working capital you need to fund growth without going to outside sources. This is an exercise I learned in school, through books (including Running Money from Amazon), and through discussions with successful business people. What is amazing is that as we started looking at margins (about 12 months ago) we have successfully been able to raise prices to existing clients, re-price our services to increase margins, and apply technology to reduce costs that directly impact margins.
What this did mean was certain things that would have been allocated to growth (i.e. advertising, new sales reps, additional marketing literature) were put on hold, and that money was spent on technology or other systems to increase margins.
But it has paid off. Although I did get the credit line, I am now looking 12+ months out and I probably will only need it sporadically. Without the focus (and yes, we look to increase our margins around 5-10% per quarter, and we measure them monthly, per client, per product line) we would have spent a ton more money on financing costs.
3.) Run constant cash flow models. This is also something that I hear preached, but is not so practiced. Cash is king and the MBA courses prove it. You should be running 10 week rolling cash flow forecasts. These can be done in Excel or in your accounting tool. Whatever, you should be able to say where you expect your bank balance to be every week for the next 2 1/2 months. Don't be fooled into thinking you know, because if you are not projecting it, then comparing how real your projections are, you'll end up being surprised (i.e. the Christmas party required a $5K deposit that you didn't realize would drain the account).
Stop looking at profit ... look at cash flow first ... then margins (both gross and net), which should give you the P&L your looking for ... one you can fund.
4.) And yes, stop growing so fast. We'll this is the nasty one. If you didn't get your funding in order 12 months ago, and you didn't keep expanding your margins, then yes, you will need to reduce the spending on sales and start collecting more in the kitty. Otherwise you'll either lose the business (see the Inc article above), or go out of business, or some external force will slow it down for you (your suppliers, stock-outs, customers) and that type of external slowdown will be very expensive (either via moral, lost customers, reputation, late fees, etc).
See you on the wire.