RevenueLoan Blog

November 13, 2010

How to find capital to grow your business

Filed under: educational,news — Christian @ 10:00 am

Many small businesses find themselves in a difficult situation through their own success.  They have some success, reach a certain size, and then struggle to find the investment required to take their business up to the next level.  In the current economic climate, bank loans are hard to come by – even for profitable companies – and many small business owners struggle to find the collateral to secure a bank loan.  Angel Investors aren’t interested if the company is too established, and Venture Capitalists usually won’t bother with anything that isn’t going to make them billions in the near future.

One way to finance growth is to trade an equity stake in the company for cash.  Usually this is achieved by handing over a portion of the shares in the company to the investors in return for the required investment, which then dilutes the value of stock held by the existing shareholders.  This form of investment leverages the long-term performance and growth of the company for a short-term capital investment.  Classically, equity investment is used to pay for the development of a new product and the desired sales strategy for it, and can be seen as trading one debt (development costs) for another (diluted equity).

The other method of getting finance is the non-dilutive revenue based financing, sometimes called royalty-based finance, or RBF.  RBF leverages a percentage of the increased profits to pay back the investment, so there is no dilution of the company stock or ownership.  This works best in a situation where a company has a product in market and sales strategy, but doesn’t have the capital to invest in that strategy.  By bringing in the necessary investment, the company uses the money to increase sales of the product and increases its revenues faster than it could without the investment.

Which of these financing options a business should pursue depends on many factors, but the bottom line is decision whether RBF – which costs a portion of the company revenue – or equity financing – which costs a part of the company – is the most expensive to the company, and which the management is most willing to give up.

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