If you are seeking extra capital to run your business, you do not always need to seek external sources. There could be enough money inside your business to fund what you need.
Before you start the hunt for cash or approach the bank for funding, it’s essential you accurately assess the amount you need.
What can you save?
If you need $120,000 to fund a project, are there $10,000 worth of savings you could find in your business every month for 12 months? Possibly you could, even short term;
- Sub lease any spare space to another business.
- Reduce temporary staff and try to allocate work to full time staff instead.
- Remove any staff surplus to requirements, or see if any staff wish to take early retirement (you never know).
- Investigate savings from your larger overheads which could be telecommunication and internet costs, power, rent etc. Have your suppliers retender for your business.
- Explore other options and suppliers for any materials or variable costs. You may find a cheaper supplier that sells the same product or ingredients. Consider searching online to identify suppliers that have much lower overheads. If you spend significant dollars on a raw material, and you could save significant dollars, then you should consider it seriously. Loyalty to existing suppliers only goes so far (or your existing supplier may drop their prices if they know you may move away).
The keys to assessing your requirements are accuracy and honesty:
- If possible, use benchmarking data to influence your costs and return on investment (ROI) forecasts.
- Estimate cash flow with inflation and commodity price rises in mind (your costs will likely rise slowly over the years).
- Make sure you cut out any needless expenses to improve your overheads and margins.
- Consult an accountant to review your findings.
Before you proceed
Remember, the lowest risk option for raising capital is to simply find what you need from your own savings or assets.
Securing investment from an investor will probably require you to relinquish equity (shares) in your business, along with a degree of control. Borrowing money from a lender will see you charged interest – which is essentially money down the drain as far as your business is concerned.
If possible, assess whether you can raise capital by selling unwanted assets or through restructuring your costs and saving over time to achieve your capital goals.
Sources of capital
These are some of the most common, untapped, sources of capital for savvy small business owners:
Inventory and other assets
Having too much inventory on hand can be detrimental to your business – there are storage costs and deterioration to name a few issues. It can also mean you’re asking where all your cash is going.
If your inventory isn’t turning over fast enough and is becoming obsolete, try to clear it out, reduce your orders, and build up your cash reserves.
Consider reducing your inventory levels, by using just in time ordering. You will find suppliers are getting better and better at delivering smaller quantities just when you need it. You do need to balance the possibility of volume discounts. If you have $240,000 worth of inventory, and can survive with only half that amount, then you have uncovered the $120,000 you needed.
Tighten cash cycles
If you collect what is owed to you faster, then you end up paying less interest costs (if you needed to fund it), or receive additional interest if it’s money in the bank.
Here are our suggestions to boost your cash cycles:
- Invoice quickly. Any bills should be sent out as early as possible, regardless of the due date. A client is more likely to pay early if they receive the bill earlier.
- Ask to paid earlier. Most clients and customers will be more than happy to oblige if they can afford it.
- Offer incentives for early paying customers. This could be a discount on follow up orders or a small service offered free of charge.
Bootstrapping is a popular method for growing a business with minimal costs. You can harness free resources, call in favours from similar businesses, borrow equipment, and use other creative means to build your business without breaking the bank.
It’s about making smart and economic decisions to generate cash flow without acquiring too many costs.
Here are some suggestions:
- Team up with a neighbouring business to offer joint promotions or special offers.
- Share office space with other like-minded businesses.
- Take advantage of social media to grow your marketing presence.
- Sell old or obsolete equipment that you haven’t used in the last year.
- If you really need the cash, you could also sell equipment or assets that are valuable and lease them back, such as selling a building you own which will generate a lot of capital (but then you are faced with rental costs).
Grants and incentives
There is a wide variety of Government grants and incentives available to help eligible small businesses grow in Canada.
Possibly there are existing staff members that would be interested in investing in your business as an ‘angel investor’.
Angel investors typically pick investment opportunities in their fields of expertise so they can apply their experience to helping the business succeed, but the benefit of existing staff is that they know the business and the opportunity.
In return for capital investment and their expertise, angel investors typically take equity in the business and expect a healthy short term ROI.
Crowd funding is the newest trend in raising capital and is most appropriate for high risk creative and artistic projects that wouldn’t typically receive funding from a bank, angel investor or venture capital firm.
Instead of seeking capital in its entirety from one source, crowd funding sees businesses seek capital in small amounts online from as many investors as they can.
Crowd funding websites post online pitches from their member businesses that offer rewards, discounts and special privileges (such as receiving a pre-release or beta version of a product) in return for small investments.
Each crowd funding website operates to different rules, so make sure you research your options carefully before choosing one as a platform to seek investment.