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3 paths to growth through investment

Equity vs Debt:  What is best for your business?

Paul Surtees in finance, profitability
Nov 30

If you're looking to grow your company to the next level, deciding which path to take can keep you awake at night. Organic reinvestment of revenue, taking on company debt and raising equity are all viable options that can fuel growth; however, debt financing can be a powerful tool  if you have a dependable business with current revenues that can cover the repayment of the loan.

organic growth for selective businesses

Organic growth is a must for any successful company; however, it needs to match your aspirations and risk appetite if you're using it as the primary tool for expanding your business. Reef Knots, a friend's company that is a fantastic producer of men's ties and socks (and future maker of swimming trunks), has gone from initially operating out of a bedroom to two London shops in just three years. With no debt or shareholders, the success of the business is based on the founder's grit and revenue reinvestment. A great success story, but perhaps not the right growth strategy for many small businesses.

Carefully consider taking on shareholders

Raising equity makes sense if you have a company with a product or service that requires you to gain market share quickly. A large upfront capital investment or a big idea that can help you stay ahead of the competition are two examples where taking on shareholders could be necessary. Will the money allow you to double your growth rate in a sustainable way? That’s often what it takes to make adding shareholders worthwhile. Otherwise, you may sell too much equity in the beginning stages of your company and find your original investment highly diluted.

Having a collective boss looking for monthly and quarterly updates, projections and high returns on their investment can be highly motivating for some entrepreneurs (like myself), but it's not for everyone. By giving away some control of the business in exchange for capital, you are now accountable to others. 

The benefits of using Debt 

Debt is often viewed negatively, but if planned for and managed well, it can be leveraged to yield outstanding returns, while offering the flexibility and control you need to reach your business growth goals.

A fashion business spin-off from a successful company is setting up an e-commerce solution and requires funding through several routes. Capitalise is helping them get a startup loan, a secured overdraft and one of our partners is doing an equity raise through crowd funding. This could not have been accomplished if the fashion business waited until the need for funding was at the point of being critical.

With the rise of platform lenders and other sources of small business financing, there are more options than ever before to help small business owners achieve their growth goals – while still maintaining their vision for what they want their companies to become.

recruitment firm for which I am a shareholder recently added temporary work to their permanent placement business. As a cash flow intensive business, the firm often requires funding through invoice financing, but had a negative view of such debt. Their perspective quickly changed when they realised the value of their permanent placement books was 1x profit while the value of their contractor books was 5x profit. Over time, the value of the business will be far higher if they choose to sell. Like equity, debt needs to be measured against the return it can generate, so planning is very important.

 

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