Business Growth Strategies
Decisions about Capital Structure and Strategy Determine a Company’s Growth Trajectory
By Felix Leslie
Head of Commercial Banking Corporate Advisory
The origin stories of the businesses on the Inc. 5000 list of the nation’s fastest-growing private companies are dynamic tales of entrepreneurs who conceived new products or services, disrupted existing markets, or anticipated needs as they emerged.
The owners of these organizations have succeeded in ushering their visions into reality. But what comes next? How do innovative startups grow beyond proof of concept to become sustainable, thriving, high-growth businesses?
Much rests on the owner’s success in raising sufficient capital to support growth and addressing strategic matters thoughtfully.
Imagine a startup with a great product, so great that somebody wants several hundred thousand units quickly. Assuming the business can scale production, it will need to pay someone to produce the units and secure the capital to do so.
For most small-business owners, the first stop should be their bank. The ideal capital solution is low cost: a bank loan or revolving line of credit.
But expecting your bank to give you such a loan if you don’t have an established relationship with your banker may leave you disappointed. From the time you launch your business, meeting with your banker regularly to discuss your plans and provide updated financials or financial presentations is key.
Of course, for companies with limited historical cash flow, a traditional bank loan or revolver may be out of reach. Instead, inventory or accounts receivable can sometimes be used as collateral for an asset-based loan.
Capital sources beyond the bank
If asset-based or cash flow loans are unavailable, or the company needs more permanent growth capital, your banker should be able to introduce you to an advisor or a non-bank capital provider. There are several alternatives, but each comes with its own considerations, and all of them will require due diligence:
Growth equity is capital provided in exchange for an equity stake in the business. It will peg your company’s valuation and dilute existing equity.
Venture debt refers to a loan tailored to growth companies that is more expensive than a bank loan, because lending to a business without assets or established cash flow is risky. On the other hand, the interest and principal payments are typically delayed, giving the company room to grow.
Convertible debt carries a lower interest rate than venture debt but comes with the potentially dilutive option of converting the debt into equity later.
Tackling strategic questions
Fast-growing businesses may also be faced with often pivotal strategic decisions, including:
Form an alliance? A joint venture with or minority equity investment from a larger company can provide needed capital and operational support. However, an alliance can be dilutive and limit future strategic choices. Due diligence can be laborious.
What to focus on? Let’s say your new technology has several commercial applications. Each needs capital. How do you choose which one to build out first? Analysis of cost, timing, revenue, and profitability is crucial.
Add management talent? The combination of skills, grit, and vision needed to grow to $1 million in annual revenue is different from what it takes to grow to $30 million of annual revenue. Hiring an experienced CEO, CFO, or CMO who has done it before, or forming a seasoned advisory board, may help.
In making these decisions, seek advice from experienced professionals — business owners, investors, bankers, attorneys, accountants, and others.
Owners guiding fast-growing businesses should always think several steps ahead. As in chess, the most effective owners anticipate and prepare for several possible outcomes, while retaining as much flexibility as possible to execute on viable alternative strategies.
Finally, to maintain a company’s growth trajectory, decision-making discipline is key. The best decision makers evaluate and analyze the situation, seek advice, consider the alternatives, decide on a path, and then act. The longer you take to decide, the more likely you are to exhaust your limited capital.
Felix Leslie is head of Commercial Banking Corporate Advisory for Union Bank based in Los Angeles.
Union Bank offers customized solutions for all stages of your company’s growth. For more information about our commercial banking services schedule a call today.
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