One of the biggest challenges faced by entrepreneurs in the early stages of operating or expanding a business is finding adequate funding to get started and maintaining enough funds to meet all their obligations and invest in the future. This challenge is also faced by fast-growing, successful companies that may struggle with cash flow problems (Parks, 2006).
Building a successful business requires financing (“capital”). When starting, managing, or growing your business, you will improve your odds of success by understanding your financing needs and all of the options available to you. Understanding what funding sources are best for your business, knowing how to find these sources, and doing what it takes to get financed can save you a lot of time and frustration (Walter, 2004).
The types of financing options available to you and your business depend on the current stage of your business in its life cycle. There are four stages in a typical business life cycle (Walter, 2004):
- Development and start-up—At this stage, priorities include raising enough money to finish research and development on products and services, creating a viable business infrastructure, and limiting “out-of-pocket” expenses.
- Operating or growth—During this stage, businesses need financing to sustain growth and strategic plans, expand the business, and ensure there is sufficient cash flow for day-to-day operations.
- Maturity—The maturity phase of a business is characterized by lower growth rates, supporting mergers and acquisitions, and reducing need for outside capital to sustain operations.
- Liquidity or decline—This phase often involves financing in preparation to sell the business. Founders, managers, and important investors are seeking liquidity to recoup their investment.