Finance and treasury functions exist to leverage the productivity of operational business functions. We generate no value in a vacuum. This is not to minimize the work that we do, or to ignore the value that we can add by allocating resources efficiently. It merely serves to illustrate the symbiotic relationship of financial and operational business professionals. This symbiosis is the core of funding business growth when others cannot. The entire enterprise must speak efficiency to justify our story to lenders and investors.
Growing your business in a time of capital constraint is challenging, but possible. It requires you to operate with excellence, tell your story, know your capital needs, and be open-minded and flexible. Combining these four factors can allow you to break through your capital plateaus and reach the next level of funding—no matter where you are in the growth curve.
Operate with excellence.
Operating with excellence is the most critical component of the four. Exactly what this means varies from industry to industry, but it boils down to unusual profitability and revenue expansion. Unusual profitability requires an efficient use of time and resources. The company must improve its processes constantly and relentlessly. You must know who you are, be who you are, and sell who you are.
The company grows organically at this stage, reinvesting the profits to expand the business and create new revenue. The business must demonstrate its ability to replicate success through expansion, whether geographic or otherwise. This shows potential lenders and investors that the company’s success is the result of a sophisticated operating model, rather than a fluke of market positioning.
Tell your story.
Once your company has demonstrated that it can operate profitably and maintain this profitability through a growth stage, you must tell the company’s story to lenders and investors. Sometimes they will know you, but often they won’t. Executive management must know the story inside and out. Develop a consistent presentation and deliver it to everyone you meet—employees, vendors, lenders and investors. Update it frequently with new performance data, but leave the message consistent. This presentation should be dense and informative, but relatively brief. An experienced presenter or team of presenters should be able to give it in less than an hour.
You should always be telling your story. Take every opportunity to polish your delivery and iron out the flow. Any changes should come from the top, and all presentations must be the most up-to-date version. The operational discipline you use internally should permeate the external communications to your stakeholders. The story should be a comprehensive look at the business and financial operations. Different types of stakeholders will focus more on various performance metrics, and you may add pieces to your standard presentation to facilitate this, but the core message should remain the same.
Know your capital needs.
The business that expands wisely and sustainably is the business that knows its own capital needs. Have a plan for growth in place before you approach lenders and investors. Forecast effectively, maintain and update your inputs, and have the pieces in place to deploy your capital when the money comes in. Nothing negatively impacts your return on assets more than idle cash that sits on your balance sheet.
Depending on your business model, your forecast will change. As you discover new information, the plan evolves with you. Be sure that you know your business and know what changed, and be prepared to answer questions when your capital needs don’t match expectations. Be conservative in your estimates to allow room for fluctuations when things don’t go exactly as planned.
Be open-minded and flexible.
Once you have your story in place, be open-minded about whom you approach for funding. Pursue multiple capital sources concurrently. Commercial and investment banks are only the beginning. If capital markets are not your area of expertise, consider engaging a professional firm that is well-connected with the capital markets for your industry.
Through its growth cycle to date, LGI Homes has used the following sources of capital at various points in its cycle:
- Mezzanine debt
- Small secured bank revolvers
- Private equity-funded joint ventures
- Friends and family-funded joint ventures
- Friends and family equity offerings
- Large secured bank revolvers
- Initial public offering of common stock
- Convertible notes
- Large unsecured bank revolvers
- Reinvestment of profits.
Through all of these stages, the message has remained the same: we operate profitably and generate excellent returns. Lenders and investors have responded, providing the capital to fund LGI Homes’ growth from a small regional homebuilder to a major national player.
The macroeconomic environment can be quite unpredictable at times. Sometimes there is ready appetite to fund your business growth, and sometimes it’s more challenging to track down. However, by using these steps as a guideline, it is possible to overcome even the most challenging market factors and fund your business growth.
David Wiggins, CTP, is director of finance and treasury for LGI Homes Inc. Charles Merdian, CPA, is CFO of LGI Homes Inc.