Businesses should keep all avenues of funding open
By Lee Hwee Boon Managing Director, Head of Middle Market and Services, Global Enterprise Banking, OCBC Bank
There are generally three growth phases in a small and medium-sized enterprise's (SME) life cycle - start-up, growth and maturity. Challenges faced by a business in the 'growth' stage, such as those like Benjamin Barker, are not widely known and I'd like to shed some light on funding during this transformational time.
Companies in this stage typically run into difficulties when they ramp up operations to deliver against a breakthrough order, enter overseas markets to achieve scale, or acquire businesses. I notice that then businesses find it tough to obtain financing because their requirements are disproportionate to their historical financial performances and balance sheet size.
Some enterprises choose to fund growth solely by reinvesting profits. This works if the capital expenditure requirements are not large.
Increasingly, enterprises have opted to work with partners (such as private equity firms and family offices) to tap growth capital.
Taking this path can help the business leverage strategic synergies through the collaboration. But it also dilutes the stake of existing owners and cedes partial control to an external partner.
In light of this, businesses also use bank loans to support growth. Banks provide financing options which can be used to develop new capabilities, to cover set-up costs in new markets, or to bridge financing gaps for sizeable projects. Going with a bank at the "growth" stage also means that a company starts building a credit history and a repayment track record, which makes it easier to tap bank financing when the need arises in future.
There is no ideal mix of debt and equity for any business. Your best bet is ensuring that all three avenues of funding remain open so that you have the flexibility to rebalance your financing mix according to your business' life cycle and expansion requirements.