How do I know when it’s the right time to raise capital?

A lack of investment can cost businesses their growth, but how do you get the timing right?

You have an established business, a strong proposition and a healthy customer pipeline. Perhaps you even have a realistic organic growth plan that can be achieved by investing profits back into the business. Why would I need to raise external capital? you think.

The trouble is, organic growth takes time. During which, market dynamics can change, customer demand can dampen and in some instances, first-mover advantages may be lost.

The reality is that a lack of external investment can cost businesses their growth. But equally, it can be really difficult to know when the right time to seek investment is and how to go about it.

Fortunately, we’ve asked the experts and they’ve given us a round-up of their top tips for assessing whether now is the right time to raise capital…

1. Focus on value creation

While ideal timing will differ depending where your business is in its lifecycle, ultimately, the decision to raise capital should focus on value creation.

Ask yourself: how will raising capital create opportunities to add value?

Being blunt, you pay for whatever capital you raise, whether that’s via equity, working capital or a conventional bank loan, so you need to ensure the investment is purposeful and that the positive outcomes exceed the initial costs.

Focus on what securing an investment or loan would enable you to deliver. You might be about to win a significant new contract, but internal resources are already at capacity – you need to expand your team, but also need additional capital so you can do that. Perhaps you’ve spotted an opportunity to diversify your customer base by buying a business that has a complementary offering. Maybe you need to invest in product development to maintain your USPs and keep customers away from the competition.

An injection of cash, regardless of the type of investment or loan, should act as a catalyst for growth when these opportunities arise, and ultimately should have a positive impact on long term revenue generation.

2. Think about the big picture

Investment rounds take a lot of time out of senior management’s day-to-day roles and raising capital has financial implications on the business, so when you begin a fundraising process you need to ensure it aligns with the business’ long term plans.

Think about the business’ more imminent cash needs, but also account for your future capital requirements. While it is in no one’s interest for a business to over-leverage itself, you equally do not want to end up with less cash than you really need. Calculate how much you will need to support your growth objectives within the desired timeframe and then work backwards from there.

3. Keep an eye on the competition

If the main competitors in your market segment are either raising funds or making strategic moves that imply an injection of extra capital, this could have an impact on your growth.

Larger and more aggressive sales and marketing budgets, new product or service enhancements and the ability to offer more attractive prices could mean your competitors increase their market share, or even win over your existing customers.

Taking on investment and utilising the capital proactively could help you stay ahead of the curve and move faster when opportunities do arise. This is particularly true in markets that are highly saturated (and so small differentials make a real difference to the customer) and highly disruptive sectors, where a lack of continuous innovation means you’ll quickly be left behind.

4. Strike while the iron is hot

The negativity associated with personal debt may leave some thinking that it’s better not to borrow – and for very small businesses, or for those without aspirations to scale, this may well be true. Growing organically is tough and often businesses will hit a wall, where continued growth just isn’t possible without a cash injection.

In these instances, it’s much easier to raise capital while your company is in a good financial position, with a positive growth profile and a strong cash runway. Many SMEs and high growth businesses start the fundraising process too late, when cash flow is already tight, which can land them in tricky situations.

It is therefore generally a good idea to begin fundraising before you think you’ll actually need the cash.

The fundraising process often takes longer than expected and even more so in times of economic and political uncertainty, such as the environment we currently find ourselves in. No one wants to be left in the position where they are forced to accept less favourable terms from an investor due to a lack of choice – keep your options open and start the process early.

5. Assess wider market appetite

Raising capital doesn’t happen in a vacuum – the terms that lenders are available to offer, their risk appetites and ideal client profile are all influenced by what’s going on in the macroeconomic environment.

If you are raising debt, pay close attention to interest rates and market forecasts.

If you are raising equity, consider market sentiment towards company valuations, and in particular, the valuations within your sector.

And whatever type of funding you’re seeking, it’s worth considering general market appetite. For example, the British Business Bank’s 2023/24 Small Business Finance Markets report notes a “significant slowdown in mid-market deals” since 2021 that continued into 2023. The number of lenders offering certain types of deals and the number of businesses competing for these deals – and vice versa – is constantly evolving. Keeping afloat of market appetite will give you a better understanding of where your business sits on the continuum.

6. Don’t delay – get going

If you’ve got to the bottom of this article and noticed an overlap between your own business and some of the scenarios we’ve discussed, then you probably already have your answer – now is the time to start looking at your fundraising options.

You can use our knowledge bank for loads of resources on various funding streams, how they support growth and what types of businesses they’re suited to. Or, get in touch with one of our lending experts, who will be happy to advise on the best next steps towards accelerating your growth.