Help to Grow: Management Course | Kingston University

Growth sucks cash

By Dr Juan Soon
June 7, 2023

Growing the business is challenging and often requires strategic planning, major changes in entrepreneurial strategy and substantial resources. In some cases, some firms find themselves “growing out” of business because of liquidity crisis which leads to firms unable to meet their financial obligations. The cause of this liquidity crisis is mainly due to the increased expenses as a result of growth and lack of planning. Owner-managers may also be focusing their attention on sales and revenue, rather than expenses and administrative challenges that accompany with growth.

In this case, owner-managers need to search for short to long-term liquidity (cash injection) for the firm to ensure the going concern of the business. The cash injection comes in mainly two forms- debt, or equity. In some cases, owner-managers might opt for both if it is optimal for the firm. To address the liquidity issues of the firm, there are several options that owner-managers can consider when comes to cash injection:

Owner’s capital (equity)– This is when owners use their own money to meet the financial obligations of the firm.

Friends and family (equity or debt) – Some friends and family members who believe in the business may offer to help. But in return, they may want some shares in the company or interest payment.

Bank loan (debt) – This could be a difficult and long process as the business owner needs to prepare a detailed business plan to convince the bank for a loan.

P2P lending (debt) – This is faster than banks, but there may be limited investors and higher interest rates.

DeFi loan (debt) – A lot more accessible than bank loans and other P2P loans. The use of smart contracts (automated contracts) makes it process loans a lot faster than traditional lenders. However, the limited regulatory framework can make it difficult for small firms to navigate the DeFi lending landscape.

Share issue (equity) – Sell off part of the business in exchange for cash.

Overdraft (debt) – An overdraft is a way of borrowing money through your business current account. However, the interest rate associated with it can be high.

Invoice invoicing (debt) – A company uses an invoice or invoices as collateral to get a loan from a financing company.

Apart from those options, the firm can also try and negotiate with its suppliers to extend the trade credit. Selling assets would be the last resort for the firm, this can be painful for the firm but at least it ensures the going concern of the business, which allows owner-managers to plan their next steps.