For each stage of its development, a company needs a funding method adapted to its growth. Whether it is equity to launch a project, credit to support its commercial development or to propel new products on the market, entrepreneurs must establish a financing strategy to ensure the sustainability and expansion of their businesses in the long run.

 

What Are the Stages of Growth of a Business?

Identifying the company’s life cycles allows managers and investors to :

  • To prepare adequately to face different challenges and risks
  • Take advantage of potential economic opportunities
  • Select appropriate funding sources

 

Business Life Cycle

1. Start

After validating the project study and identifying the target audience, the start of production and sales of products or services begins. Based on internal funds for the acquisition of equipment, premises and personnel if necessary, in this phase it is important to invest in marketing and to listen to customer feedback in order to adjust the products to their expectations. Because revenues are low and initial start-up costs are high, companies are likely to incur losses during this stage.

2. Growth

In this phase, companies generate rapid sales growth to break even and make profits. Entrepreneurs need a well-developed financial plan to boost sales and a marketing strategy to overcome competitive challenges and threats.

3. Consolidation

The consolidation phase is characterized by continued sales growth, but at a slower pace due to market saturation or the entry of new competitors. It is necessary to explore new potential markets, based for example on product or service innovation.

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4. Maturity

As the company matures, sales begin to slowly decline. Thus, profit margins decline, while cash flow remains relatively stagnant.

However, it is important to note that many companies extend their life cycle during this phase by reinventing themselves and investing in new technologies to win emerging market segments. This allows entrepreneurs to reposition themselves in their industries and generate renewed growth.

5. Decrease

In the absence of a new marketing and financial strategy, sales, profits and cash flow all decline. During this phase, companies accept their failure to extend their life cycle by adapting to the changing business environment. Eventually, they lose their competitive advantages and exit the market.

 

What Are the Preferred Sources of Funding at Your Stage of Growth?

Access to funding and its cost are determined throughout the life cycle of the company according to the risk level envisaged by each phase. The risk of the company decreases as it achieves sales involving growth in liquidity and profitability.

Start-up Phase Funding

At this stage, the company has a high operational risk. Thus, the agents interested in funding are entrepreneurs who want to invest in their idea, their relatives who want to support them, and investors who are willing to invest their capital in an idea that is risky but has a high profit potential. High risk, high reward.

The main source of funding for the company is capital investment by partners, friends and relatives. As the company achieves sales, it strengthens its power to convince outside investors of its business potential.

At the start-up stage, angel investors can also provide financing. Often, they are business people with a high tolerance for risk, extensive management experience and an objective of making their investment grow over the medium and long term before selling their shares. Government loans are also interesting funding tools for SMEs.

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Growth phase funding

At this stage, the company still has operational risks, but its sales increase significantly and its cash flow becomes positive, as does its profitability threshold. Thus, new investors are willing to support the company, since the risk of having a negative return on investment is getting lower and lower. Unlike the start-up stage, these investors are now institutions and not only individuals.

Venture Capital companies are composed of different partners specializing in private investment of young companies with high potential. Investment comes from the different partners. Usually, these partners require a significant return and therefore, this method of funding is relatively expensive.

In addition, a venture capital company is interested in an active participation in the management of the company and will therefore own significant shares, in addition to a seat on the Board of Directors. These companies are experts in management and have a large network of contacts, making them important allies in the growth of a company.

Institutional and corporate investors can invest directly in the company or by becoming partners in a venture capital company. Their interests are financial and strategic. They are usually pension funds, insurance companies or foundations.

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Consolidation Phase Funding

Funding during the consolidation phase is a continuation of the previous stages. Angel investors probably want to exit their position and sell their shares to another angel or to the company directly.

Maturity Phase Funding

Funding at this stage is available in the form of debt, long-term debt and equity offerings. Banks are interested in lending money to a company if it is now able to demonstrate sufficient financial health to repay the loan.

Banks will always be willing to finance, but as the company becomes mature and profitable, the terms are more attractive to the company as it is less risky in the eyes of the lenders.

Banks will then analyze the working capital, interest coverage and debt ratios. Projected financial statements are also requested to support the company’s financial health.

Proper use of debt is very important for businesses, as interest payments are tax deductible, which lowers the firm’s cost of funding. The company itself can issue debt through commercial bonds. It will thus obtain direct funding from its creditors in exchange for fixed payments.

The public issue of shares is done on the public stock markets. The company pays a fee to an underwriter (usually a broker from a large bank) who will ensure the sale of the newly issued shares to the various investors, whether private, institutional or individual.

Consolidation Phase Funding

This stage is not characterized by any particular funding method. Typically, funding at this point may stagnate, as the company has less need for liquidity as a result of operational decline.

It is important to know that the funding methods above are not exclusive to each stage of growth. The idea here is to show when a company can access a type of funding depending on its stage of growth. Of course, as a company evolves in its life cycle, the previous means of funding are still available.

 

Want to Consult a Financial Management Expert?

The financial management of a company is not a task to be taken lightly, especially in an increasingly uncertain economic environment. With its expertise in accounting, financial modeling and business intelligence, Cofinia is able to support you throughout the life cycle of your company by offering customized solutions that allow for financial stability, whatever the challenge.

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