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How companies attract money to finance growth

FINANCIAL STANDARD
By | February 10th 2009

By Odhiambo Ocholla

It takes a lot of work to attract money to finance growth, especially in this period of tight credit squeeze and slow economic growth.

When a company plans to raise capital for funding future growth and providing liquidity, investors can simultaneously pursue taking the company public or raise venture capital.

This strategy may sound unusual, but it can pay off in some instances because much of the preparation for an Initial Public Offering (IPO) mirrors steps for obtaining venture capital funding.

When the IPO market goes bearish and investors’ confidence is low, companies can quickly and easily shift into pursuing risk capital funding.

This strategy is important because the company is able to access the venture capital and postpone its IPO, rather than succumbing to pressure to go public.

Initial Public Offer market

In today’s environment, company executives must prepare extensively for a search for financing. Is this the best of times or the worst of times for companies looking to raise capital?

The answer depends on which industry your business is. Companies should still find capital from the established venture capital firms and banks that continue to lend money.

Until interest rates rise further and commercial banks begin to spend more time on restructuring loans, this may be a good time to borrow funds.

Companies planning to go public may also encounter changes in the IPO market, as exemplified by low investor’s confidence and a bearish market at the NSE.

In the past, a company going for IPO market would garner investor attention.

However, in today’s market, companies need sound fundamentals to attract interest and this impacts on their ability to raise capital.

Although the competitive marketplace for capital can be intimidating, management can do a lot to position their companies for growth financing.

Ultimately, the best way to raise capital is to remain true to the fundamentals of running an efficient business with an eye to cash flow, growth opportunities and profitability.

Attracting money

Here are some ways to prepare companies to attract money: (i) Market the company. Companies trying to raise capital should not overlook the importance of differentiating themselves from the competition.

An integrated marketing and public relations campaign can help a business clearly communicate the company’s value in the market before it presents the financing opportunity to investors. Companies need a better profile and PR communications strategy.

It is difficult to go to the market when no one has ever heard of you.

(ii) Know the business. It is crucial that company management are clear and conversant on all aspects of the company’s operations, growth strategy and business model.

(iii) Find the right source. Companies are encouraged to look for different sources of capital.

It makes sense to shop around among many potential financing sources before agreeing to a deal.

From a deal-making perspective, the more options a company has, the more leverage it has in negotiating terms.

It can use leverage to get better interest rates, give up less equity, negotiate less restricting covenants, and minimise bank fees and charges.

Once the company has identified several potential sources of capital, the next step is to develop a business plan that articulates where the company is, where it’s going and how it will get there.

Business models

Another strategy is to build supportable business models. Company executives should understand their business model and growth plans.

Finance executives should make sure they have a good understanding of their company’s financial statements, cash flows, accounts receivable and accounts payable; understand the sources of the organisation’s pipeline for new business; know about accounting issues that could affect the profit-and-loss statement, and understand the business model and the assumptions that went into building the model.

The model must be realistic and achievable, or the CEO will lose credibility that may never be recovered with a potential financing source.

Mr Odhiambo Ocholla is an Investment Banker based in Nairobi and can be reached at [email protected]

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