When it comes to investing in businesses, the risk for lenders waxes and wanes depending on what the business’s growth levels are. So for example, the risk of investing in a new business is always higher than investing in a business that has been around for a while. Lenders or investors can figure out how risky the business is by evaluating the business’s cash flow and assets, using the latter as collateral. Because this is far more difficult to assess in new businesses, their risk profiles are always higher. Businesses go through various stages of growth and each of these will present different characteristics which will affect their chances of financing.
Financing your business in the early phases
Understanding seed capital
The seed or launch stage is where it all begins. This is where the idea for the business is tested to see if it will work. At this point, basic research may be done, but it hasn't been proven that it is actually viable. Most of the time, a formal business entity has not even been set up yet because a decision has not been made about whether or not to start the actual business. During this seed stage, an entrepreneur usually only needs a small amount of capital to do business feasibility studies, make prototypes, evaluate market potential, protect intellectual property, and look into other parts of the business idea. At the end of the seed financing phase, the entrepreneur can decide whether or not to commit to starting this business.
After deciding to start the business, the next step is the pre-launch phase. During this phase, the business is built from the ground up. At this time, it is very important to make a detailed business plan that explains how the business will be set up and run. This stage usually needs a lot more money than the seed stage. Angel investors may be interested in giving money at this stage, depending on the situation.
During this period, the first step is often to register the business and make it official. The business's operations will be limited by the chosen legal entity. Along with this, the business will buy the equipment and other assets it needs to run. During this stage, the business usually hires management and looks into all the rules and licenses it needs to follow. Along the business' supply chain, the business' founders and the newly hired management team will need to secure distribution and secure marketing relationships.
During the start-up phase, sales begin and production starts. This involves getting people to work for you and putting your products on the market. Financing for the start-up phase includes bridge financing from the time the pre-launch phase is funded until operations begin, requiring enough working capital for the business to run smoothly, funding for any losses during the start-up phase, and emergency funds in case the start-up process is interrupted by something unexpected. It is possible to get funding for both the pre-launch phase and the start-up phase at the same time.
This stage of funding is also known as the ramp-up stage. It means that production and sales are going up. Growing the business by making more sales is a sign of success because it proves the company's business model. The business may be getting close to breaking even and making money is in sight. Venture capitalists may be interested in funding this phase if the company shows clear signs that it will be able to make money in this phase. From a strategic point of view, being able to speed up the company's growth could launch it into its growth stage, where it becomes profitable and can pay for its operations with money from within the company.
Funding your business in the expansion stage
This financing comes after the first-stage financing. It refers to the stage where the business can acquire working capital because it is now making and shipping products, with a strong inventory and track record. But even though the company has grown, there are still times when it may not be making money.
This phase is also known as Mezzanine funding. This is funding given to a company that is making money, has growing sales, and wants to expand in a meaningful way. These funds are used to keep building up the business, for marketing, as working capital, or to make better products.
The bottom line
Businesses grow methodically. At each stage of growth, there is a need for funding. These needs differ depending on the phase, and lenders will award differently to businesses depending on where they are in these different growth phases. If your growing business is looking for quick working capital to fund its next phase of growth, contact Merchant Capital today and fund your business in the next 48 hours.