How to Determine the Financing Needs
of Your Business
In the world of business, getting the financing right can be the trickiest feat to achieve. With so many moving parts to consider and the state of the economy as it is, money is often an issue everyone faces, but at the same time, not everyone wants to talk about it.
Let’s lift some of the mystery off the issue and determine how you can determine the financing needs of your business.
How urgently do you need funding?
The most pertinent question you need to ask yourself is how quickly you need to get access to a certain amount. You will always have a better chance of getting approved for a loan (or any other type of business financing) if you have a plan in place and can provide cash flow projections.
If you have waited too long and your needs are now dire, you will be considered a higher risk. You will also be much more likely to make faulty decisions, as you are under heavier stress to make the right one.
The best avenue to take is to plan your finances as far ahead as possible based on cold hard numbers. That means focusing your plans on things like actual revenue and cash flow data. That way, your applications will go down more smoothly, and you will be more likely to get a lower interest rate.
What’s the economy like?
In a weak economy, lenders tend to have stricter requirements and often demand much more extensive paperwork. If you are able to act preemptively and prepare everything you are likely to need, your chances of having your funding approved will be higher.
A weak economy also means that more businesses will be applying for funding than usual – so the competition will be steeper and you will need to arm yourself with an excellent pitch. What makes your business a better candidate for funding than someone else who does something similar, and is also looking to attract additional finances?
What’s going on in your industry?
If you’re operating in an industry in which the demand is at an all-time low, you’re less likely to receive the backing you need. However, if you have created a product or service that is likely to shake up the industry, you need to use that fact as your talking point. You’ll want to make sure your potential lenders realize what you can bring to the table.
If your business operates only at certain times of the year, and is in need of an initial cash boost to get things off the ground at the start of the season, make sure this is clear in your application and pitch. After all, no lender likes to see zero income over a period of several months – but if you explain how your market operates, you are much more likely to be perceived as a quality candidate for funding.
What kind of funding can you access?
Depending on a plethora of factors (like the age of your business, your industry, size, market share, cash flow, and so on), you will qualify for certain types of funding. Here are some of your options:
- Investments from friends, family, and others in your immediate circle
This option has as many clear pros as it does cons. On the one hand, there’s no vetting process and zero competition. There may even be zero interest. On the other hand, these are your friends and family members, which may or may not mix well with business.
- Debt financing
You can get a term loan or a line of credit, with more or less flexible repayment schedules and terms. However, make sure you take the interest rate into consideration and carefully weigh all of the available options.
- Online loans
With the rise of the internet, we have gained access to online loans, which are simply an alternative to regular bank loans. They can come with better interest rates and shorter approval times, but make sure you read the fine print as well.
- Equity financing
If you are on the track of something very promising (and are also a startup, in most cases), you can attract funds from angels, venture capital funds, or business incubators. In this case, make sure you weigh the equity you’re sharing with your investor, and how it will affect your business.
- Grants or subsidies
You may even be eligible for government funding, so you should definitely take a look at the grants being offered in your area and line of industry. These kinds of grants are not only a way to secure funding, but also a great way to market your business.
Don’t forget that getting your hands on the funding you need is merely the first step: you also need to make sure you manage these fresh funds well, and that you utilize them for the purpose laid out in your business plan or loan application.
Once you get funded, your investors will demand something from you: results, payments, growth. If you’re not sure you can deliver, you might want to look into a different way to finance the needs of your business.