Business Tools

Building the American Dream: How to Finance Your Company's Growth

Participants of the "Preparing Your Company to Finance Growth" webinar learned about the various financing options available to business owners early on in the building years.
Most experts agree that the economy is beginning to recover and many businesses are poised to take advantage of growth opportunities through hiring, expansion or infrastructure investments. So, how will your company finance its growth and increase market reach?

Louis Goodwin, senior vice president and regional manager for Wells Fargo’s Inland Empire Commercial Banking office in Southern California, and Bob Staiger, a principal in the Swenson Corporation of business financial strategists and CPAs, answered this question and many more in the “Preparing Your Company to Finance Growth” webinar, tailored exclusively to automotive specialty-equipment professionals. Topics included:

• Can I expect lenders to provide financing?
• What do lenders need and expect from today’s borrowers?
• What financing sources are available, and how do they apply to me?
• How can I use professionals to assist in positioning my company for growth?

Four Cycles to Building the American Dream

According to Goodwin, the first cycle in building the American dream is the early years (one to three), characterized by rapid sales growth and minimal profits, no excess cash flow and a significant need for growth capital.

The next stage is the building years (four to 10), characterized by continued hard work and the fruits of your labor. Profits are retained to finance the growth. Despite making more money, cash is at a premium. Business owners have a strong relationship with trade creditors, and bank lending is becoming available to augment other sources of capital to finance growth.

The harvesting years (11–15) is when companies are well-established in the community and industry in which they operate. They are predictable and have more sustainable operating profitability. Sales growth has slowed from the early years, but may have escalated via acquisition. Companies are producing excess cash flow.

The transition years (15+) are mature companies where operating performance is steady and predictable. Sales growth has slowed but may escalate via acquisition. An established banking relationship exists. Ownership succession issues have materialized and the company, or portions of it, may be an attractive target for sale.

Financing Alternatives for Companies in the Building Years

Lenders are mostly interested in financing positive purposes, such as growth. If not profitable, financing becomes more expensive and difficult to maintain. This is common in the early stages. Economic downturn may have negatively impacted the growth rate of many companies or their ability to repay debt. This is more costly in the earlier years because of such a short operating history. Also, collateral support is weak. Companies may experience high R&D and marketing costs that negatively impact cash flow and ability to repay debt.

Financing options include:

1. As property values and equity within homes begin to stabilize, this will be a common means for entrepreneurs to secure capital to invest in their companies to finance growth.

2. Customer-vendor financing is most often overlooked. Talk to the people who know your business best first.

3. Finance equipment directly through capital leasing companies or indirectly in association with dealers or companies from which you buy equipment.

4. Factoring or purchase-order financing is not dependent on the financial performance of the individual company or leverage within the company. Capital required to arrange for a purchase being made is provided upfront. It’s costly financing, but cheaper than equity. Business owners should see a gross margin in their sales of at least 25% to justify this type of financing.

For small-business administration loans, qualifications take into account both personal income of owners and projected future income.

Financial Fluency

A lender needs an understanding of your business. Tell them your objectives, plans and how much you need to get there. They require financial information that depicts historical and future earnings, as well as a clear understanding of the collateral available to support the financing.

Because there is a push for financial fluency, business owners must understand the financial and business language of their operations, according to Staiger. People multiplied by process equals profit. Measuring daily the number of customers you have multiplied by the frequency, or the number of interactions you have with a particular customer, multiplied by the average sales price and the efficiency in getting those orders out, because they all result in revenues. The end result of these activities is your company's financial outcome.

“Don’t change one thing 100%, look at all of the areas for opportunities in your business, and increase those things 1%–2% incrementally to create great change in your organization,” Staiger said. “You have the income statement, which speaks to the profit, the operating cash flow statement and the balance sheet. A fourth statement, or dashboard, should be activity-focused to look at day-to-day operations and things you could do to capture real-time reporting and effect change in your business.”

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