Sources of Capital for a Growing Business

Sources of capital for a growing business

The growth stage of a privately-held business can include any number of activities, including new product development, purchase of new machinery and equipment, expansion of an existing facility, opening of a new facility, or even the acquisition of another business. The common denominator among all of these is the significant investment of capital required to successfully accomplish them. Of course, for most businesses, the capital available to deploy on the expansion project is generally limited.

So where can a business obtain the additional capital needed to fund its growth plans? The following are some sources of externally-derived funding available to privately-held companies:

  • Commercial banks – Likely the most common source of capital is debt financing obtained from a commercial bank. This can take the form of short-term working capital loans or longer duration term loans collateralized by some of the company’s assets. Depending on the strength of the company’s financial position and/or its relationship with its current bank, the company often needs only to ask its lender for the additional loan or increase in credit facility, especially in today’s low interest, high credit availability environment.
  • Commercial finance companies – These non-bank lenders provide long-term debt financing similar to that of banks, and are often interested in specific projects such as equipment purchases or long-term plant expansions.
  • Factoring – Another form of non-bank financing, a factor provides a company with an advance on its accounts receivables, with the balance less a discount or fee paid upon collection of the receivable from the customer. In effect, the company receives most of the cash from a sales transaction almost immediately, improving its working capital position and ability to fund other projects.
  • Investment banks – If the current ownership is willing to relinquish some of its control in exchange for a capital infusion for the company, investment banks can assist with a private placement of equity. In such a transaction, the investment bank locates institutional or individual investors who purchase equity in the company in a privately-arranged deal.

Some potential sources of funding can actually be derived from the resources of the business. They include:

  • Retained earnings – A business can look internally to its own stockholders’ equity. By foregoing or reducing the payment of a dividend or distribution, the owners are leaving money in the business to be reinvested.
  • Employees – A company can consider setting up an employee stock ownership plan (ESOP). Through an ESOP, employees can purchase shares in the company, or receive them as compensation, both of which improves the cash position of the company and provides equity financing. Added benefits of the ESOP are the production efficiencies often experienced by businesses that are employee-owned, as well as the overall pride felt within the organization.
  • Suppliers – Extending the terms on the amounts owed to suppliers – for example, from 30 days to 60 days – may provide the temporary boost in capital needed for a project.

Lastly, here are a few additional sources of capital that a growing company can consider:

  • Federal, state and local agencies – There are loan programs run by the U.S. Small Business Administration and various state and local economic development offices that may be available to companies that meet certain criteria.
  • Peer-to-peer lending – A relatively new kid on the block, peer-to-peer lending is an online source of crowdfunding that continues to gain in popularity. While it may not be a practical solution right now due to project size limits and other restrictions, the concept doesn’t seem to be going away any time soon. It may be worth keeping an eye on crowdfunding for future developments or refinements that might make it a more viable alternative.

Michael A. Coakley can be reached at Email or 215.441.4600.

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