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Loading ...Businesses need capital for a variety of reasons. Generally speaking, below are the reasons capital may be required:
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Startup
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Working Capital
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Expansion / Growth
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Estate Planning
Startup
Now, let’s assume there’s a great product (e.g., innovative) or service that you want to sell. To sell this product or service, you will need some infrastructure and resources (e.g., computers, equipment, people, software, etc). Yes unfortunately, the old adage, you must spend money to make money, is true.
Working Capital
There is typically a lag between the time your product and/or service is sold to a customer and the time you receive payment. This lag depends on the customer but typically is between 30-60 days once the customer is invoiced. But, you likely will have to pay your suppliers / vendors within 15 - 30 days for the raw materials you need to make your product or service. Therefore, you owe money for the raw materials before you have actually received payment from your customers. In addition, some expenses typically are prepaid (e.g., insurance, rent, etc.), which will increase the cash needs of your business.
We will soon be posting an overview of items to consider when negotiating agreements with suppliers and vendors.
Expansion / Growth
If you want to accelerate your company’s growth, you generally need to make additional cash investment. Examples of growth funding include building out your sales force, opening new offices (i.e., geographic expansion), or buying and developing new technologies. Now, some companies are able to utilize their own cash flow to help fund growth. However, other companies may not have adequate cash flows or be willing to risk all their own cash flows. In these instances, it could be a good time to seek funds from investment companies (e.g., mezzanine firms, private equity firms,). Some firms may require ownership control but several firms will make non-control investments. You can review the different financing sources in our Sources of Financing section once we have completed it.
Estate Planning
If your company is a family-owned business and the next generation is ready to take control, you will need financing to transition ownership to this next generation. You could think of this like an acquisition of sorts - the next generation is acquiring the company from the current generation.
