When discussing growth with small businesses, I often am informed with pride that "we don't have any debt." I often find this an interesting statement, especially when the company admits that they haven't been capable of growing to the full extent that they know the market can tolerate. Literally I have encountered the previous statement in a conversation that included the comment "We could have double the clients if we only had the money to finance our growth." In business school, it was often suggested that debt was the least expensive form of financing. This may be especially true of small businesses (please note that I am aware that some businesses qualify for grant capital, but usually this is a very small case). Debt cost is easy to measure, and as long as the managers are wise in establishing acceptable levels of debt that contemplate the potential market risks that accompany any business, I would recommend considering the option. In one of my clients cases, the acquisition cost of new clients was one of the reasons for delayed growth. Nonetheless, the low churn rate as well as the high margins of his business sold made allowed for those costs to be covered within four months of signing up. Easily a line of credit at a local bank would have covered this acquisition cost.
Here in Austin, a very entrepreneurial city, I hear the topic of Venture Capital funding thrown around as the first option. I've met with multiple founders of startups in the city and all ask me about my connections with VC's in the area. My immediate question is "Why do you want to go the VC route?" One reason that personally bothers me is the perception that because of the inherent risk that VC's assume as well as their deep pockets, VC's are seen as a "low-cost" option of financing growth. This is absolutely misconceived. VC's are actually a very high cost option. Not only do VC's take a percentage stake of a company, they will also often include clauses that give them governing power in order to protect their investment, and they will require the equivalent of a 20 - 25% return on their investment. This in no way means that I think VC's are a bad idea, I just would encourage people to look for other options first. This especially true as the recent economic recession has made it very difficult to get financing from VC's. Many are changing their way of doing business and in the process leaving out all the small businesses out of the competition.
In "Venture Capital Funding", by Stephen Bloomfield, he quotes Mike Southon and Chris West who list the top ten sources of capital financing. Although there is a little tongue in cheek, since Mike Southon's services include VC funding consultancy, I think there is value in listing these sources:
1. your own money;
2. grants and soft loans;
3. revenue from the business;
4. a mentor;
5. a friend;
6. your bank;
7. revenue with the enticement of future equity;
8. business angels;
10. gentlemen in dark glasses.