Companies poised for growth first face important decisions about financing. Growing a business comes at a price, and that price can be paid many ways — loans, stock offerings, equity arrangements, bond offerings and crowdfunding. Here are three things businesses should consider when evaluating how to raise capital:
Cost of financing
One of the fundamental financing questions a business must grapple with is: How much am I willing to give up?
Many people think of the cost of financing as a simple interest rate, but a variety of funding options are available to companies, depending on their size and funding needs. Early stage companies with few assets and minimal revenue often find that venture capital is their primary option. Venture capitalists will require an equity stake in exchange for financing, and it is important for early stage companies to evaluate the level of control and future profits they will give up in that exchange.
Other funding options for early stage companies include crowdfunding, a new model that harnesses online networks to aggregate funding from a large base of small investors.
Crowdfunding engages consumers and raises brand awareness, but achieving large investment sums is difficult, and the process can be labor intensive.
Established companies have a much larger range of funding options, and stock, bond, equity stakes and loans should be explored with an eye for the most affordable overall financing option that raises the desired amount of capital.
The price that a company will pay for investment capital should be directly tied to the opportunities for growth in the marketplace. Buying an undervalued competitor at an affordable price or increasing market share are opportunities that must be balanced with the price of capital. Calculating this equation correctly is key to building a strong and profitable business. Focus on investments that have a long-term payoff — technology and equipment that translate into continued efficiencies, or research and development that keeps new products in the pipeline.
A rational and balanced attitude toward risk is fundamental to good investment decisions. A business that is too risk averse might miss prime opportunities to grow, while a cavalier attitude toward risk can be devastating.
A clear-eyed, objective analysis of risk should guide every investment strategy. Stick with the fundamentals of good decision-making when assessing risk — the cost of debt, the value of the investment and the profit potential. A financed investment in your company always holds some risk, but minimizing risk is key to successful investing.
John Solari is the managing partner of J.A. Solari & Partners. He has 25 years of accounting experience and also is a member of the American Institute of Certified Public Accountants and the Nevada Society of Certified Public Accountants.