Authored by Josphine Kiruku — Communications and Learning Co-ordinator, Youth Impact Labs
Covid-19 has undoubtedly presented working capital shortages for startups. With challenges such as stockouts due to limited product mobility within towns or import restrictions and reduced demand for non-essential products and services, startups are going back to the drawing board and devising new strategies to recover and regrow their businesses amidst the economic crisis that the pandemic has presented, while identifying ways of raising capital during this period.
Some of the options that these startups can leverage to ascertain business continuity as they scale operations include:
- Combination of debt and equity financing
Debt financing occurs when a firm raises money for capital by selling debt instruments to investors, while equity financing is the process of raising capital through the sale of shares according to Investopedia. Companies that leverage both sources of financing are more suited to succeed in scaling, and there are a number of financial vehicles that exist in the market that provide startups with an opportunity to seek these financing options.
Based on what the purpose of the funds is, be it to offset short term obligations or purchasing an asset, startups should utilize the resources available in order to determine the right form of financing to utilize for a particular type of expenditure.
2. Scaling strategy
During fundraising, a common question investors ask startups is what their 3–5-year scaling strategy is. This is followed by the startups estimating the amount of cash they would require to adopt the scaling plan/strategy outlined. This provides the startup with a frame of mind in identifying what activities need to be undertaken to scale their solution in their market and achieve sustainability and profitability. Startups should develop a viable innovation forecasting into the next 5 years and estimate the cost to scale operations since it will help the startups determine the most relevant type of investment required.
3. Working capital management
Startups should closely monitor their short term cash inflows and outflows to ensure that there is sufficient working capital and avoid being in the red for too long, which limits their runway. According to business expert, startups can improve their working capital in the following ways:
- Faster Invoicing Terms
- More efficient collection of invoices and late payment enforcement
- Credit checking potential customers
- Better inventory management
- Negotiate better payment terms with suppliers
- Increased financial awareness across all departments
However, in cases where startups face stock-outs and are unable to pay suppliers, they can engage companies that provide LPO financing to ascertain the flow of supply within a given period.
4. Grant financing
Though not easy to access especially during a crisis, grant financing is a viable solution to working capital boost. Recently, Mercy Corps’ Youth Impact Labs supported its partners with working capital grants to help in the following ways:
- Provision of working capital to ensure a consistent balance between demand & supply and adequately cover operational costs that relate to heightened safety measures including purchasing masks, sanitizers, and personal protective equipment
- With business operations stagnating or drastically slowing down, Youth Impact Labs is providing support to enhance the survival of these businesses during the pandemic and enable recovery, post COVID-19.
- Provision of expertise and technical assistance to digital businesses to pivot their business models and operations. This will enable them to tap into opportunities
Timely capital is viable to startups that have a scaling model which considers; the amount needed to scale, the relevance of product offering pre, during and post-crisis, target market, potential bottlenecks, and opportunities to scale and a 3–5 years growth plan. What strategies is your startup applying?