Article The Best Source Of Finance And Funding For Fast Growing High Growth Businesses
Fast-growing businesses can often struggle to raise enough finance to keep up with their demand for working capital. The situation, often known as over-trading, occurs when a business is taking on new business faster than it can afford to fund that business. The issue often boils down to customers taking long periods of credit to pay the supplier. Even if the terms of payment are clearly agreed as, for example, 30 days, businesses will often take twice that credit period to pay i.e. 60 days. This creates a "funding gap" for the business - they have to provide the service or the goods, typically incurring payments to suppliers. They have to then wait for the duration of the credit period in order to get paid by the buyer.
The following summary of our recent research confirms that invoice or sales finance, such as factoring (with credit control) and invoice discounting (funding only), is a highly suitable source of finance for high-growth and fast-growing businesses. What it does is bridge that funding gap. Rather than waiting to be paid by customers, the fast-growing business is given a prepayment by an invoice finance company immediately. Typically the cost of manufacture or provision of the service is less than 100% of the sale price so the prepayment covers the manufacturing or service provision costs.
We conducted some research amongst fast-growing companies in order to understand the sources of finance that they used and how closely they met the requirements of high-growth companies.
We surveyed 100 high-growth companies, defining high growth as at least 20% turnover growth per annum. Amongst our sample, the average growth rate was 37.5% and the range was from 20% to 75%.
59% of those fast-growing companies said that they did not have sufficient finance to support their growth rate, the sources of finance that they said they used were as follows (note some respondents may have quoted multiple sources of finance):
- 47.9% Loans
- 32.4% Overdraft
- 19.7% Family money
On average they said that they were 42.6% short of funding - a significant funding gap. None of these businesses used invoice finance. In fact, the findings of our survey were that 12% of high-growth companies that we spoke to said that they used invoice finance and none of them had any inadequacies in the level of funding that they had available.
79% of the high-growth companies said that they could have increased their growth rate if more finance was available and again none of those were users of invoice finance. The invoice finance users amongst our sample made up 52% of the businesses that said they were growing at the maximum rate that was possible and that additional funding would not enable them to grow further - a testament to the strong suitability of invoice finance style funding such as invoice discounting and factoring to high growth businesses.
