Risk & Business Magazine Lovitt & Touché Fall 2015 - Page 24

Financing Growth Financing Early Stage Growth for Entrepreneurs BY: GREG CRABTREE, PARTNER, CRABTREE, ROWE & BERGER, PC T he entrepreneurial conundrum: you have a product or service that the market really needs, but how will you finance it? For many, this is the hardest hurdle to pass. Here are my recommended sources of funding, ranked in order of best outcomes. Profits Surprised this tops the list? Don’t be! If you can get the current activity level of your business to a 10%-15% level of profitability, your business funds its own growth. It generally means slower growth in the early stages, but it builds a commitment to profitability which then bankrolls future opportunities. As we have focused our clients on profitability first, their bank funding needs have become minimal to nonexistent. Their challenge is now “what do I do with my cash” instead of “where did the cash go?” This approach requires one simple rule: you leave all of the after-tax profits in the business until the business has more cash than it needs. We call this your “Core Capital Target:” when you have two months of operating expenses in cash with nothing drawn on a line of credit. Just like the top performing mutual fund, if you reinvest your dividends by leaving them in the business, you can make your business your best performing asset! Your own cash This may seem obvious, but many entrepreneurs have cash outside of the business that they would rather keep separate, and choose instead to borrow funds inside of the business. You may have your reasons, but I prefer you to put the cash in as capital because I find entrepreneurs to be far more careful with their own cash than they are with debt. Bank Line of Credit Lines of credit sound great, but if you did not get profitable first, the bank is not likely to give you one. Lines of credit are essentially advances against a business asset (i.e. Accounts Receivabl