Funding Your Growth Stage

Understanding the distinction helps you choose the right funding structure.

Working Capital: Purpose: Cover day-to-day operations, manage cash flow gaps Characteristics:

• ●Shorter term (under 24 months typically)
• ●Flexible use
• ●Revolving access (like credit line)
• ●Cost: Higher rates, shorter payback

Best products: Line of credit, short-term loans, MCA

Growth Capital: Purpose: Fund expansion, new markets, significant investments Characteristics:

• ●Longer term (3-10+ years)
• ●Specific use
• ●One-time deployment
• ●Cost: Lower rates, longer payback

Best products: Term loans, SBA loans, equipment financing, equity

Why It Matters: Matching funding term to asset life is critical:

• ●Funding equipment with 5-year life using 6-month MCA = cash flow disaster
• ●Funding seasonal inventory with 10-year SBA loan = unnecessary interest

For Growth Stage Specifically: You likely need both:

• ●Working capital: Buffer for scaling friction
• ●Growth capital: Fund the actual expansion

Different expansion strategies require different funding approaches:

Physical Expansion (New Locations, Facilities) Funding needs: Real estate, build-out, equipment, initial inventory, working capital buffer Best products:

• ●SBA 504: Real estate and fixed assets, lowest rates
• ●SBA 7(a): General expansion, flexible use
• ●Equipment financing: Specific equipment needs
• ●Bridge loan: Fast capital while SBA processes

Timeline: Plan 90-180 days for full funding package Key consideration: Don't underfund—include 3-6 months operating reserve

Market Expansion (New Territories, Channels) Funding needs: Marketing, sales team, inventory, customer acquisition Best products:

• ●Business line of credit: Flexible draw for variable costs
• ●Revenue-based financing: Scale with revenue growth
• ●Term loan: Known marketing investment

Timeline: Can often fund faster (30-60 days) Key consideration: Track ROI closely, adjust spending based on results

Product/Service Expansion Funding needs: R&D, inventory, equipment, marketing Best products:

• ●Term loan: Specific development costs
• ●Equipment financing: New production equipment
• ●Line of credit: Variable development costs

Timeline: Depends on scale Key consideration: Validate market before full investment

Team Expansion Funding needs: Salaries, recruiting, training, workspace Best products:

• ●Line of credit: Manage payroll timing
• ●Working capital loan: Bridge until revenue catches up
• ●Revenue-based financing: Payments adjust as revenue grows

Timeline: Usually fast-track needed Key consideration: Revenue should cover payroll within 3-6 months

As you scale, think strategically about your capital stack:

The Hierarchy of Capital Cost: Cheapest to most expensive (generally):

1. ●Retained earnings (free, but limited)
2. ●SBA loans (Prime + 2-4%)
3. ●Bank term loans (5-15%)
4. ●Lines of credit (8-20%)
5. ●Alternative term loans (15-30%)
6. ●Revenue-based financing (20-40% effective)
7. ●MCA (30-80% effective)
8. ●Equity (most expensive long-term—you're giving up ownership)

Strategic Stacking: Use cheaper capital for larger, longer needs:

• ●SBA loan for major expansion
• ●Line of credit for working capital buffer
• ●Equipment financing for specific equipment

Don't use expensive short-term capital for long-term needs.

Maintaining Financial Flexibility: As you grow:

• ●Keep line of credit available (even if unused)
• ●Don't max out debt capacity
• ●Maintain cash reserves (3-6 months expenses)
• ●Build banking relationships before you need them

When to Consider Equity: Debt isn't always the answer. Equity may be better when:

• ●Growth rate justifies dilution (10x+ potential)
• ●Cash flow can't support debt payments during scaling
• ●Strategic value from investor (network, expertise)
• ●Industry norms favor equity (tech, biotech)

But remember: Equity is expensive. 20% of a $10M exit = $2M. Same growth funded by $500K in debt = you keep that $2M.

Lenders and investors evaluate scaling businesses differently than stable businesses:

Revenue Metrics:

• ●Revenue growth rate (20%+ YoY is strong)
• ●Revenue predictability (recurring better than one-time)
• ●Revenue concentration (diversified customer base better)
• ●Gross margin (healthy margins fund growth)

Efficiency Metrics:

• ●Customer Acquisition Cost (CAC)
• ●Lifetime Value (LTV) and LTV:CAC ratio (3:1+ is good)
• ●Payback period (how quickly customers pay for acquisition)
• ●Unit economics (profit per transaction/customer)

Financial Health:

• ●EBITDA (or path to profitability)
• ●Debt service coverage ratio (DSCR > 1.25)
• ●Operating cash flow
• ●Working capital cycle

Preparing for Growth Capital Applications:

Clean up financials:

• ●Professional bookkeeping (not DIY)
• ●Accrual accounting (if any complexity)
• ●Monthly financial statements
• ●Clear budget and projections

Build the growth story:

• ●Market opportunity size
• ●Competitive advantage
• ●Growth strategy detail
• ●Capital deployment plan
• ●Return expectations

Demonstrate execution:

• ●Historical growth achieved
• ●Team capabilities
• ●Operational scalability
• ●Risk mitigation plans

Avoid these pitfalls that derail scaling businesses:

Mistake #1: Growing Too Fast Problem: Revenue grows but cash flow can't keep up Solution: Model cash flow needs before scaling. Include receivables timing, inventory investment, hiring lead time.

Mistake #2: Undercapitalizing the Expansion Problem: Run out of money mid-expansion Solution: Raise 20-30% more than you think you need. Include contingency.

Mistake #3: Wrong Funding Structure Problem: Short-term expensive capital for long-term needs Solution: Match term to use. Patient capital for patient growth.

Mistake #4: Ignoring Unit Economics Problem: Growing unprofitable business = bigger losses Solution: Ensure positive unit economics before scaling. Don't "grow into profitability" without clear path.

Mistake #5: Overleveraging Problem: Debt payments constrain operations Solution: Keep debt service under 20% of cash flow. Maintain flexibility.

Mistake #6: Losing Focus Problem: New markets/products distract from core business Solution: Strengthen core first. Expand from position of strength, not desperation.

Mistake #7: Waiting Too Long Problem: Miss growth window while seeking "perfect" funding Solution: Good funding now beats perfect funding later. Opportunities don't wait.