Get the money you need to grow, without the debt » SMEInsider

Get the money you need to grow, without the debt

When you’re itching to get your great idea off the ground, it might be tempting to take money from wherever you can, but in the longer term this strategy could actually limit growth and cost you money.

Having a huge debt hanging over you, in the form of a bank loan or other funding that you have to pay back, has obvious issues for your cash flow. So what other options are there, and how will they affect you in the long run?

Firstly, while it might seem like a straightforward and comparatively low-risk strategy, trying to fund your company with the savings you have available can cause problems. At some point, the likelihood is that you’ll hit a financial hurdle and will need to look for outside help as your business starts to get off the ground. If you’ve already used up your personal finance or equity options to get to where you are, you no longer have these as a last resort.

Desperation is never a good look, not least when you’re looking for a bit of leverage with banks or other investors. While you might think you’re limiting the potential damage to what you currently have in the bank, it’s often a better idea to get a more reliable source of funding lined up early so that you aren’t backed into a corner just as you need a break.

What’s more, you do need to take into account your “burn rate” for cash in the business. While you might be able to launch your software or online empire from a back room with few outgoings, the same will not be true of a company based on manufacturing, which will need significant investment early on. No startup should be spending a fortune on frills, but trying to cut costs where they reduce quality may cost you more in the long run.

One of the better ways to deal with the issue is to look for investment that is based on equity share, rather than loans. This means that your funders are intrinsically involved in the success of the company and will do better out of the situation if you turn a decent profit, rather than looking to claw back a loan, even when this will hurts the business overall.

That said, giving away too much equity is potentially costly and dangerous in the long run. You’ll need to make sure that you maintain executive control, and that you are not underselling part of your company if it’s going to take off further down the line!

Including early buyback options may be a good idea, but more importantly, looking for a partner that offers far more than money means that you are not just giving away a chunk of your company, you are actively investing in the guidance, networks and strategic wisdom that can help your company to grow. A whole lot more exciting than negotiating repayment terms on a bank loan, and with far less risk to a startup’s success.