Stages of Business: When Will You Need Funding?

As startups turn to established companies, and established companies turn to mature organizations, there’s a good chance of finding yourself needing more cash than you have in the bank. But it can be hard to plan for when those moments happen so you can be ready. We’ve gathered a list of some critical moments across each stage of business where you may need extra cash to grow.

Funding Needs During the Start-up Stage

Being the owner of a start-up is hard. Sometimes it seems like there’s never enough time or money to get everything done that you’re after. That’s why spending money carefully and knowing exactly what to spend it on is so important at this phase. At the same time, accessing funding at this stage can be the most difficult since new businesses can take up to several years to start generating revenue, and your core business model may still need to be proven. Simply put, it’s a greater risk for lenders. Nonetheless, through grants, specialty loans, or angel investments – getting funded and proving you are “backable” is still extremely possible.

• Setting Up Shop: For businesses that rely on foot traffic, a spacious, well-designed retail space can be exactly what you need to attract new customers and show off your products. Businesses that rely on warehouse space for manufacturing or packaging can have similar needs to help spur growth and get units shipped and out the door. But renovating an owned business location can cost $30K or more—and purchasing or renting a new space plus renovations can cost well beyond that. 

• Establishing a Digital Presence: In today’s world, one of the best ways to expand awareness for your company and your brand is a great presence online. That means a website, social media channels, and even videos to explain your products or services. A well-developed website with strong content for a new company can cost anywhere from $3K to $20K depending on the design and its functional needs, and engaging video content can cost just as much. But to attract new customers and establish your credibility, this upfront cost can turn out to be a very worthwhile investment.

Funding Needs During the Growth Stage

According to data from the U.S. Bureau of Labor Statistics, around 20% of businesses fail within the first two years, and 45% within the first five years. If you’ve moved past the start-up stage, this is a huge accomplishment. It means your business model is proven and customers want what you are offering. But as you grow, costs become larger and the number of people who depend on your business will likely grow beyond you alone. That’s why taking on debt at this stage can be stressful. It means borrowing and spending carefully in ways that ensure continued growth.

• Growing Your Team: Whether you’re a product or service-based company, more customers means more demand, which means you’ll need more help. And at one point or another, producing and selling what you offer will likely become impossible for just you, or even a small team. That means hiring and thinking more about insurance, benefits, onboarding, training, and more. But despite the cost, these human resource items can help you build a thriving workforce to carry your company forward for years to come. As a rule of thumb, plan to spend on average $915 per month extra in benefits for every new employee that joins your team. With this cost in mind, many business advisors and growth strategists recommend having more than $40K of cushion in your business bank account before adding two or more team new members.    

• Expanding Your Resources & Assets: The amount of capital it takes to expand your tangible business resources & assets (think machinery, real-estate, inventory) really depends on the specific industry you’re in (no surprises there). Let’s say your construction business just won a new contract. Here, like in many other businesses, the common phrase rings true: “you need to spend money to make money” since you will likely need to purchase materials and pay labor costs before you’re first check. You also may need new equipment, a sub-contractor with specialized experience, additional company vehicles, and so on. In this example, raw materials to start a new job might cost as little as $5K, but when you add new equipment & a specialized sub-contractor into the mix – experts recommend having at least $20K of cushion in your business bank account to fuel growth. 

Funding Needs During the Mature Stage

By the time you’ve reached the mature stage of your business, you will have mastered your craft, solidified a unique position in the local market, and developed a growing list of happy customers. But as the saying goes, “success breeds complacency, and complacency breeds failure.” With that in mind, finding new ways to continue growing is vital to avoid stagnation and eventually losing customers who are always on the lookout for better options. 

• Diversifying Your Offerings: As your business grows, it’s natural—and often expected by customers—to expand your product line within your niche. For example, if as a start-up you sold t-shirts online, it may have been a natural trajectory to add other clothing items to your website, like sweaters, jeans, and jackets. But as a mature business, how can you continue to capture a larger portion of the market that goes well beyond that? For many companies, vertical or horizontal integration can be the answer. Vertical integration means expanding your business into a new point of the supply chain. With this example, you could work to purchase your own manufacturing facility as a means to strategically expand. Horizontal integration, on the other hand, means expanding your business by acquiring other companies at the same point in the supply chain (i.e., direct competitors). In either option, the costs involved can be considerable. It’s impossible to say how much you would need to acquire a factory or competitor, as these markets usually operate “behind closed doors” given their private nature, and the cost really depends on your industry. With that being said, purchasing a competitor or new factory in your industry can be as low in cost as $250K — or as high as $30M. Regardless of the cost, you’ll want to arrange the financing before you approach the potential seller to eliminate headache and heartache down the road. 

• Entering a New Market: In a similar strategy to vertical and horizontal integration, it may be a good option for your business to enter an entirely new market. Experts caution that this should only be pursued if you’re fundamental business model is very successful, as you’ll need to lean on this stable stream of income to finance this expansion. With all of that being said, entering a new market can be a great way to expand – especially if your current resources, technologies, or employees already lend themselves well to new functions. If you currently own a large fleet of buses for a transportation business, why not adapt a portion of your fleet enter the rental business to diversify income streams? In addition to purchasing new assets, entering a new market can mean large costs for advertising to generate awareness and for sales infrastructure to drive new sales conversions. There’s no set amount of capital that experts recommend to enter a new market – the exact number will differ considerably even for two businesses of the same financial standing. Entering a new market not only requires an investment upfront – but also requires what lenders refer to as “execution risk” which means your own knowledge of the new space may be limited, resulting in blind spots and potential financial losses. If you’re business is considering expanding into a new market – the best thing to do is to work with a local expert who can help you draw up a strategic plan to navigate the specific circumstances of the expansion with ease. Many times, your local community lender, community bank, or credit union team has the right mix of local experience with business expertise to support these plans. Remember – expanding into a new market can be one of the most risky, yet rewarding ways to keep building your business. 

What Small Business Funding Options Are Available?

There are plenty of loans and grants to make businesses successful, but – the problem is finding the right ones. That’s why Backabl offers a one-stop resource to browse and apply for loans and grants that match your goals, from some of the best lenders around. Wherever you are in your business journey, creating an account on Backabl can help you get one step closer to where you want to be.