A recent post of ours discussed the fact that the majority of small business failures are the result of insufficient cash flow knowledge and management skills. Interestingly enough, many of the companies that fail due to cash flow problems start out with insufficient funding. In other words, startup owners did not secure enough funding to keep things going for the first few years.
That moment you realize your startup has insufficient funding is a critical moment. The decisions you make from that point forward will ultimately determine whether your business succeeds. Among those decisions is how you are going to manage cash flow.
Cash Funds Daily Operations
There isn’t a hard-and-fast amount of capital every startup needs to succeed. Funding needs vary based on industry, the size of the business, and many other factors. Yet the one thing universal to all startups is this: cash is that which funds daily operations.
When your startup needs office supplies, you can purchase them with a credit card. Buying raw materials from a variety of vendors generally means having 30 days to pay. But when those 30 days expire, you need cash.
Likewise, employees cannot be paid with credit cards. An entrepreneur needs to have cash in the bank to make payroll. The fact is that cash funds daily operations. That’s why the most successful entrepreneurs are not afraid to exhaust every opportunity to raise cash.
Plenty of Options Available
Entrepreneurs can take comfort in the fact that there are plenty of options for raising cash. One of the easiest and most effective for on-demand cash needs is debt factoring. Also known as invoice factoring, it is what we do. We buy a company’s debt in the form of unpaid invoices. Businesses benefit in that they only need to sell enough invoices to meet immediate needs.
Debt factoring is not the only option. There are others:
1. Supply Chain Financing
Supply chain financing is sometimes described as the opposite of invoice factoring. Rather than selling us their invoices, a business will finance what it owes to its vendors. This allows the business to pay its bills without immediately spending its own cash.
2. Equity Investment
Startups with more significant funding needs often turn to equity investment. Perhaps you have seen TV shows in which entrepreneurs pitch their business ideas to investors. If investors like the idea and its potential, they will commit a certain amount of money in exchange for an equity stake in the business.
The downside to equity investment is that business owners often need to give up some measure of control over their operations. A more attractive alternative is crowdfunding. In a crowdfunding scenario, a business seeks investment from regular people willing to contribute small amounts. In exchange, those investors are promised a financial return, early access to a new product, or some other incentive.
Combining Multiple Funding Sources
Keeping a startup well-funded until it is turning a solid profit is not the easiest thing in the world. There is also no ironclad formula for doing it. It has been our experience that it often takes a combination of funding sources to get the job done.
A startup might come to us to quickly raise cash through debt factoring. The owners of the company might also follow up in a few weeks by pitching their business to equity investors. They may rely on credit cards to pay for office supplies.
That moment you realize your startup is insufficiently funded is an important one. How you address your serious lack of funding will determine your company’s future.