By: Krista Morgan, CEO of P2Binvestor
Competing demands for resources often cripple the growth trajectory of emerging companies. The need to recruit and retain top talent, support marketing initiatives, build inventory, and invest in technology or research and development can put significant strain on cash. Day to day operational challenges, such as a slow A/R pipeline or seasonality, or a particularly high growth period, only exacerbate the problem. Perhaps this territory is familiar to you, as most companies find themselves in what we call the ‘cash gap’ at some point in their early lifecycle.
How do we know this? We’re experts on early stage companies. After all, it wasn’t long ago that P2Binvestor (P2Bi) was wrestling with its own early stage growth challenges. Since then we’ve learned a lot. P2Bi offers a unique and elegant solution to help avoid the cash gap before it occurs and importantly, position your company to achieve its full growth potential.
Can you afford to delay growth?
For many companies the cost of delaying growth, intentionally or not, can be high. As companies mature they are constantly evaluating opportunities that impact growth. Access to capital allows them to make strategic decisions sooner, deploy capital more quickly and keep ahead of the competition. Why does this matter? A company’s growth rate impacts its valuation at exit, and investors perceive greater value in a faster rate of growth.
For example, a company with monthly revenue of $100,000 and growth rate of 4.5% (70% annually) will generate $10 million in annual revenue after four years. A reasonable valuation at that time would put the exit price at 3x revenues or approximately $30 million. If the same company were to boost its monthly growth rate to 6.5% it would generate $23 million in annual revenue after four years and a higher exit valuation of $70 million. In this higher growth scenario the multiple applied is approximately the same at 3x. It is more likely, however, that a premium would apply in recognition of the company’s speed to scale.
Importantly, the magnitude of this progression is enhanced with timeliness: the sooner a company can capture increased growth, the greater the value later. Managing the cash gap, therefore, should be viewed as a strategic rather than tactical initiative.
What is the value of your capital?
When evaluating the cost of cash gap solutions, it is critical to consider what the funding will enable you to do and what those actions are worth. For example, a $250K loan at a 20% APR might seem expensive at a $50K annual cash cost. However, if the loan enables you to increase your monthly growth rate from 4.5% to 7.5% (and annual revenue from $1.5 million to $1.8 million), that same $50K price tag can be a cost effective means of boosting growth and achieving a higher exit price.
In addition to the nominal cost of capital, factors such as turnaround time, flexibility and lending ceiling will also impact the value of any capital a company accesses. As an entrepreneurial company ourselves, we understand this better than other capital providers, and it plays an important role in our business model. P2Bi combines deep understanding of early stage growth management issues, a syndicated risk model and proprietary technology platform to provide scalable capital in real time that uniquely supports growing companies.
There are other methods of obtaining cash, but most come with significant limitations. Let’s consider the options:
Equity is permanent, expensive and can be time-consuming to deliver. With additional equity investment, you will likely give up more strategic control. Day to day management of your investors will require time and other resources. In addition, with increased traction and sales, investors will want to participate, which could help – or hinder – efforts to accelerate growth quickly.
Debt, either from investors or as a bank term loan, generally includes a fixed payoff schedule, financial covenant tests and personal guarantees. There is a risk of under or overborrowing and it can also take several months to execute.
A revolving line of credit (LOC) is often the best structural instrument for managing the cash gap and supporting growth. It can be adjusted up or down in tandem with your need and resources – but this depends on who is providing it.
Banks are the main providers of LOCs, but are hemmed in by federal regulation and are by nature, relatively risk averse. Banks often impose strict borrowing limits based in part on unwieldy factors, such as the state of your business sector, internal bank credit limits, your personal credit score and balance sheet metrics (i.e. equity). These controls work to mitigate risk concentration in a given sector or company.
At P2Bi we manage this risk differently. We crowd source a significant portion of our extensive capital pool, which broadly diversifies our lending risk.
There are other issues. A bank may offer you an LOC initially and then find your growth rate too risky, only to rescind the offer. Then there are the fees: in addition to the interest rate, you can expect to pay annual fees, line fees and others. By contrast, P2Bi does not require covenants, line fees or minimums, and you only pay for the capital you use.
What about other lenders?
Other sources of capital, such as traditional AR financing or factoring firms, will tie their borrowing limits to a potentially growing asset: your company’s accounts receivable balance. But fees, credit insurance and capital ceilings in particular can constrain growing cash demands. The turnaround time for all of these options can be long and business lost as a result.
P2Bi meets the needs of growing companies
At P2Bi we use a proprietary technology platform that makes the lending process efficient, fast and easily managed. Capital is available within days and can be increased just as quickly. Our online dashboard provides borrowers with LOC facility, AR and inventory balances, allowing better management through insight and real-time data.
Where does this leave us? When considering the options, remember that the cost of capital is a measure of the risk undertaken by the provider. Lower borrowing rates reflect the lower risk stipulated by traditional lenders. But growth, and growth at speed is inherently risky. P2Bi’s lending rates reflect the risk of supporting emerging companies, but provide borrowers with the freedom and flexibility they need. Traditional lenders, constrained by regulation, capital limits and other restrictions, cannot truly support scalable growth quickly. It’s too risky and they won’t be able to keep up.
We think P2Bi’s approach works better. Our model is loosely based on LOC financing, but is uniquely improved to meet the real demands of growing companies. We are designed to have the capital you need, when you need it, to reach your growth potential.
So give us a call and share your growth challenges with us. Or get started here and find out how much working capital you could get. We’d like to fund your brains out.