In a recently released survey from the Bank of England, in collaboration with the Department for Business and Trade, data showed that 20% of small and medium-sized enterprises (SMEs) said they had underinvested in their business during the previous three years, yet the sector still shows a general theme of aversion to raising external finance.
Consistent with other research, 50% of businesses reported only using existing capital to re-invest in the business, along with around 70% of businesses preferring to grow slowly than to have debt.
For established companies with solid propositions and thriving customer pipelines, the prospect of organic growth fuelled by reinvested profits often seems like the logical path forward. However, organic growth takes time and as market dynamics evolve, customer demands can shift, and the pace of growth can slow behind competitors.
The reality is that a lack of readily available capital can be a barrier to business growth and so a reluctance to raise external capital is limiting SMEs’ success. However, determining the optimal time to raise capital and navigating the obstacles of the fundraising process can be daunting. If done correctly, a fundraise can accelerate a business’ growth trajectory, so here, Katherine Woodfine, Director of Debt Finance at Growth Lending, shares her top tips for knowing when the time is right to raise capital.
Adding value
While timing depends on where your business is in its lifecycle, the primary focus should be on how raising capital will lead to value creation. The capital you raise will ultimately be paid for in one way or another, so you need to ensure that the investment is driven by purpose and that the positive outcomes outweigh the cost of capital.
This value can come in many forms. For instance, securing a significant new contract might require expanding your team due to existing resource constraints and you’ll require capital to achieve this. Alternatively, identifying an opportunity to diversify your customer base could require investment in product development to stay ahead of the competition. Regardless of the reason, an injection of cash should catalyse growth.
Think of the long-term strategy
Raising capital extends beyond immediate financial needs; businesses must align their plans with future capital requirements. It’s essential to calculate the amount needed to support long-term growth objectives within the desired timeframe and then devise a strategy accordingly.
Stay ahead of the curve
Markets are increasingly saturated and disruptive, and a lack of continuous innovation can leave your business quickly falling behind the competition. If your competitors are raising funds or making strategic moves that imply capital injection, seeking investment can help you stay ahead of the curve, move faster when opportunities arise, and retain and grow market share.
Seize opportunities
The negative connotations associated with debt may leave some thinking that it’s better not to borrow, but growing organically is a slow and tough process. It’s much easier to raise capital while your company is in good financial health, rather than starting the fundraising process too late, when cash flow is tight. Begin fundraising before you think you’ll need the cash, as the process often takes longer than expected.
Know your market
Lenders and investors operate within specific risk parameters, influenced by macroeconomic conditions. Whether raising debt or equity, understanding interest rates, market sentiment, and sector valuations is crucial. Staying informed about market dynamics provides insight into your company’s position on the playing field.
Act now
If you’ve noticed an overlap between your business and the considerations discussed here, it’s likely time to begin exploring your fundraising options.