Optimize your financing needs

The early stages of a company are often a real struggle for a growth entrepreneur when it comes to having enough funds. In the previous post, Cash constraints drive creativity, the message was: don’t spend money you don’t have. Even if you keep these bootstrapping lessons in mind, as a growth entrepreneur, you’ll inevitably face situations where liquidity is running on fumes.

For many growth companies (e.g. those operating under a SaaS model) funding needs are increased by the fact that revenues are spread out over a long period, while costs are front-loaded. You can balance this by selling your customers various onboarding and consulting services, optimizing working capital management, and ensuring that you invoice customers as quickly as possible.

Great ways to improve working capital include selling accounts receivable and offering various cash discounts to customers. In recurring-revenue businesses, a common approach is to guide customers toward prepayment via pricing, such as annual invoicing, which is effectively the same as offering a cash discount.

On the contrary, projects which aim to systematically delay outgoing payments (e.g. by insisting on overly long payment terms) are more the territory of large corporations and usually don’t work for startups. That said, when funds runs low, you will inevitably need to delay some payments temporarily. The key here is to prioritize correctly and communicate openly with your suppliers. If you withhold payments to smaller companies (e.g. subcontractors) you easily end up postponing another entrepreneur’s payday and risk losing access to valuable resources in the future.

Projects which aim to systematically delay outgoing payments are more the territory of large corporations

Similarly, insisting on short payment terms for your sales invoices can be challenging for a new growth company – especially if your customers are larger companies. You can certainly try, but don’t let it become an obstacle for your sales.

Another factor that increases a growth company’s financing needs is payroll. If the owners are able to work without drawing a salary, you can significantly reduce the company’s funding needs. This is possible if you can use your personal savings, reduce personal expenses (e.g. by taking advantage of loan instalment-free periods) or have other income sources.

If these measures aren’t enough, how do you cover the remaining financing needs?

In Finland, Business Finland is a traditional source of funding for growth companies, and its financing instruments are definitely worth considering. However, Business Finland typically requires co-financing for the projects it funds, which you will also need to arrange. Traditional banks also offer various financing options for startups nowadays, often backed by a guarantee from Finnvera or another similar institution.

Venture capitalists are another good option for growth companies to consider. But if you’re not yet ready – or willing – to approach them, angel investor networks can provide funding along with valuable expertise. An angel investor typically doesn’t roll up their sleeves to concretely help execute things; rather, they act as an advisor and a source of useful contacts.

By contrast, a sweat-equity investor – a kind of hands-on angel investor – offers a skilled pair of hands to your company in lieu of money. In return, the investor usually wants either an equity stake in the company or a share of future revenue, just like a traditional angel investor. If your team is missing a crucial skill set, this type of investor can be an invaluable resource. Just make sure your expectations for hands-on involvement align, because the definition of “concrete and tangible help” can mean lots of different things to different people.