When looking to grow your business, bringing in a partner may seem like a viable way to access capital without having to deal with all the red tape and meet the stringent lending criteria imposed by banks and lending institutions. However, financing through equity is actually the most expensive form of finance in the long-term, particularly when you are a new business. Here’s why:
When finding sources for financing, many small business start-ups, often approach family or friends for the required capital; but then invariably end-up giving at least half of their business away. This approach is particularly counter-productive when start-ups are only looking to access a small amount of funding for a contract.
As the business owner is usually so excited to get the business going and doesn’t want to disappoint their first client, they would usually take on partners and agree to give up equity in the company, without always fully realising the long term implications and the real value of the equity they are giving away.
Business owners also get saddled with the wrong partners as not every partner with capital is the right business partner. So in addition to diluting ownership, taking on a partner comes with the risk of the shareholders’ not sharing your vision, values or growth ambitions. And in effect you then end-up selling your soul for a bit of cash.
And while the business owner may have the idea or intention of re-financing or buying out the partner at some stage, it rarely comes to fruition. This is because as the business grows in value, the founder is unable to buy back the 50% or 60% of the company’s shares from a partner or third party, or due to the increase in value it does not make financial sense.
It is in these instances that Ecsponent allows business owners invaluable access to funding without having to dilute themselves out of their own business. While banks and other credit providers will look at the track record of the business and the applicant, Ecsponent considers only the transactional risk, where start-ups have a contract, guaranteed cash coming in, know what their profits are, but are simply unable to raise capital from mainstream banks and alternative credit providers.
Considering that as business owners continue growing their businesses, an initial R500 000 investment could be worth R6 million five or six years down the line. Following a traditional financing route means the chances of the business owner realistically being able to afford to buy back half their business are minimal. Transactional finance on the other hand means the business owner benefits from having both equity and future profits intact.
Opting for alternative funding options is therefore something all new and growing small businesses should be considering. Find out more or contact us about Ecsponent’s pioneering business funding solutions.