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When to Pursue Capital: Key Financial Moments for Entrepreneurs and Growing Businesses

Financial planning with a laptop, charts, and a hand is writing on a notebook.

Scaling a new venture—the product of your own sweat and sleep-deprived nights—is a journey that hopefully will take you through some exciting milestones: your first sale, your first paid employee, your first physical location. As your business grows, you may find yourself making ambitious plans to expand your inventory, launch a new product line, or even take on a new geographic market or customer segment. These are wins to be savored.

But growth comes with costs, and these costs often are incurred faster than cash from new revenue streams flows in to cover them. There also can be revenue and cost misalignments natural to the business itself. Such gaps can be covered by your business’s initial capital, but if they aren’t, you’ll need fresh financing.

Planning ahead may be the difference between successfully scaling to the next profitable level—or growing your way into an unexpected bankruptcy.

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Situations to plan for

All businesses are unique, but luckily, the most common reasons for needing financing boil down to just three scenarios: 

  1. Seasonal gaps
  2. Unanticipated downturns
  3. The challenges of growth and evolution

1. Seasonal gaps

Many retailers and manufacturers have sales volumes that vary a great deal by season. Back-to-school items peak in August and September; swimwear peaks in the spring. 

And while revenues from those sales will be collected in the high season, the cost of purchasing or making those items was probably incurred well beforehand, likely at a time when revenue flows were at a low, off-season ebb. In addition, most businesses have fixed costs that don’t vary by season (think: rent, salaries, IT), which only increases the potential size of a cash flow gap during months when revenues are low.

Until you’ve built up a sizeable reserve of cash—or have figured out how to increase or create revenues during the off-season—your business may need temporary financing to survive one or more seasons of negative margins and pressure on cash flow.

Learn how a lavender farm is using online sales to overcome seasonality. Read the case study.

2. Unanticipated downturns

Whatever the inherent seasonality of your business, other “curveball” factors may hurt your revenues or boost your costs:

  • The economy may sink into a recession
  • A trade war could drive up the price of key inputs
  • A poorly judged advertisement might cost you reputation and sales
  • Your new product might run into manufacturing issues

Faced with situations like these—none of which arise from problems in the business itself—you might find new capital an essential resource to tide you over while you weather the storm. More positively, a well-timed capital infusion can allow you to maintain or increase spending in the midst of a downturn: boosting your marketing, for example, or reducing prices to help your customers and build goodwill.

3. The challenges of growth and evolution

Though growth is, of course, an essential goal, rapid growth can create its own set of cash flow and financing challenges. As with seasonal spikes, increasing demand forces increased and immediate outlays on materials, shipping expenses, and production labor, while sales and the cash they generate may lag 30, 60, or 90 days into the future.

Demand growth can also force large expenditures on new capabilities (your first customer support hire, for example) well in advance of the revenues they’re meant to enable.

Meanwhile, your customers won’t be changing their high expectations of you, so if you don’t want your business’s long-term reputation to suffer, you’ll need to keep meeting them as you sprint forward. Likewise, major projects seen as essential to the longer-run evolution of your company—a new product line, or the opening of a new office or entering a new market—usually come with large costs, both one-time and recurring.

Since such projects often can’t be funded out of monthly profits, new capital is often key to getting them off the ground.

See how a real estate business funded a move to a larger location. Read the case study.

It’s important to get well ahead of the actual need

In business, there are few things worse (or with as much potential to be unsuccessful) as having to scramble for capital on short notice. So planning well ahead of your anticipated needs is the smartest course. We advise the following:

  1. Understanding your industry’s seasonality
  2. Build a risk cushion
  3. Get a financial partner and a plan

1. Understand your industry’s seasonality 

Plan for the lean times and have enough cash available for when they might occur. Naturally, you can get a good sense of this from your historical sales figures, and even without these (if this is Year 1 for your business, for example), your pre-launch research into your chosen industry should have armed you with a basic understanding of its seasonal ups and downs.

If you haven’t already, take a look at relevant trade magazines and talk to people in the industry to get a rough sense of the timing and relative size of seasonal sales swings). Build this into your month-by-month financial plan.

2. Build a risk cushion

Start with, or build, an emergency fund for your business, so you can survive the onset of recession, a sudden negative event, or even a positive event in the form of unanticipated demand growth. If you haven’t launched your business yet but have gathered capital for it, put a hypothetical downturn into your plan and see if you’ve ring-fenced enough cash to cope with it.

If you’re already operating, start setting aside a portion of monthly revenue to build that buffer against tough times.

Just how much to save, of course, is a matter of business judgment: too little, and the cushion may be uncomfortably thin if and when something bad happens; too much, and you risk starving your growth today to guard against an event that may never occur. 

3. Get a financial partner and a plan

As an alternative (or better, as an additional measure), look for a financial partner who can approve and provide fresh capital quickly when needed. Time is of the essence if you’re losing money and burning through cash: as your resources dwindle, your business’s maneuvering room narrows and its risks increase in lockstep.

Further, the cost of financing will tend to increase as your business weakens (since the odds are rising that you won’t be able to pay back a loan), so a financial partner that doesn’t impose burdensome documentation requirements and waiting periods on you can be invaluable. 

Above all, try developing plans that include both the projects you intend to complete and the financing you need to complete them. This will allow you to obtain capital comfortably in advance of needing it to finance an expansion of your operations, for example, or a move to a new location.

Every time you write down a new goal, put a dollar figure beside it and then ask yourself: “Do I have that money, or do I need to go get it?” Without thinking ahead about both projects and capital, you’ll be forced to seek financing only when you’re desperate for it, which is often a precursor to poor decision making and less-than-desired outcomes.

Final thought: planning matters

Knowing your industry and planning for the potential ups and downs you may face is a basic element in running a business, and that planning should include your anticipated needs for fresh capital and the building of an emergency fund for unanticipated needs.

Make sure you’re mentally and financially ready for this: if you are well prepared or work with financial partners that understand your business, who can make financing decisions quickly, and can tune repayment (or equity) terms to your requirements, you’ll find it much easier to ensure your unique enterprise gets the kind of fuel it needs, exactly when it needs it. 

Building a business is an incredible journey, after all. Who wants to run out of gas half way?