Without money, you will find it very hard to properly support the operations of your business. When you do not have the ability to produce immediate finances for your business through sales, you will seek other financing options in order to inject capital into your business.
While money is a necessity to operate a business, you do not want to be hasty in choosing a financial resource. Choosing the wrong financing option can backfire, setting your business back instead of moving it forward.
Before seeking financial assistance, ask yourself the following questions to evaluate your business’s financing needs:
Do you need more capital or can you manage existing cash flow more effectively?
You must understand the difference between the two. Do not take on debt that you do not actually need. You may be wasting your additional capital in unproductive areas that do not generate money, rather than managing a strict budget. Analyze whether your money is being used wisely, otherwise, implement the changes that will produce better results. Only take on debt if it is being used to grow your business, not to offset your bad decision making.
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How do you define your need? Do you need money to expand or as a cushion against risk?
An expansion will require you to take on debt and a high-risk business will require you to have cash reserves just in case you experience a downturn or tough financial periods. Make sure that your growth plan is well designed so that the cash you receive works to achieve the designated goals. If your business has high risks, always forecast your budget properly so that you can know exactly when cash is needed. If not, you may need to take drastic measures to mitigate surprises.
How urgent is your need?
You can obtain the best terms when you anticipate your needs rather than looking for money under pressure. Your financial health should never be a surprise.
Constantly review your finances so that you can understand where your business is lacking and when financial assistance may be required. Understanding this well in advance will allow you to negotiate financial terms that are much better for your business to handle.
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How great are your risks?
All businesses carry risks and the degree of risk will affect cost and available financing alternatives. Traditional lenders such as banks tend to loan money only to businesses that are considered safe bets. Very high-risk businesses will have to rely on alternative lenders, which will carry higher interest rates and probably require a substantial upfront fee to utilize such services.
In what state of development is your business?
Needs are most critical during transitional stages. Startup capital and growth capital require very different financial terms. Startup business owners will have to guarantee more personal assets due to them not having a business that has market viability. Businesses that are taking on debt to invest in growth will receive better options due to them having an established business that has an established customer base.
For what purposes will the capital be used?
Any lender will require that capital is requested for very specific needs. Do not expect to just receive money because you are starting or operate a business. Lenders need to see a well-designed plan for funds use before they hand out money. There has to be an assurance that the money loaned out can actually be paid back.
What is the state of your industry?
Depressed, stable or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
A financial lender’s goal is to ensure that the money they lend out is paid in full with interest. A business that is operating in a struggling industry will find it very hard to receive financing terms that are favorable. This is why it is important to completely understand your market and how to actually make money in it.
Is your business seasonal or cyclical?
Seasonal needs for financing generally are short term. Loans advanced for cyclical industries, such as construction, are designed to support a business through depressed periods.
Seasonal businesses, such as taxes, typically last for a business quarter but can produce a large influx of cash. These sort of businesses do not require a significant loan. Cyclical businesses that need help to operate through downtimes will require a loan with specific financial terms that are designed to be suitable for the particular financial period they are experiencing.
How strong is your management team?
Management is an important element assessed by lenders. The experience and capabilities of your management team will have a huge affect on the willingness of a lender to loan you money. Lenders want to be assured that your team understands how to properly manage the business when faced with challenges. This is why it is important to start a business with experiences people, rather than your family or friends.
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How does your need for financing mesh with your business plan?
If you do not have a business plan, make writing one your first priority. All capital sources will want to see your business plan for the start-up and growth of your business.
Financial lenders only loan out money when a comprehensive plan that illustrates how the money will be made is presented. Your business must have a well-designed plan that communicates the money activities of your business and how your business will develop from its initial starting point.
If your business is not in the position to receive traditional lending from a bank or similar institution, you may have to go the alternative route. These are options that usually ask for more in return for lending the requested money. Only choose this option if you have the ability to quickly pay back the cash advancement before it becomes a serious burden.
Whatever route you choose to pursue, be sure you do your homework before making a final decision. You do not want to take on anything that you are not prepared to handle.
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