Essential Factors to Consider When Seeking Business Funding
Important Considerations When Looking for Business Funding
So you’re ready to take those next steps as an entrepreneur. It’s time to grow your business and develop it further, but how do you get started? Before taking the dive into the funding pool you’ll want to make five key considerations to ensure that you choose the best option for you and your business.
Determine Your Funding Needs
The first crucial consideration, and one of the keys to success when seeking funding is first to ensure that you have a clear understanding of how much money you really need, but more importantly how much capital you can afford to take. This step is foundational when securing funding to grow your business and can be done in a few steps:
1. Business Plan
You will want to first start by ensuring that you create a comprehensive business plan. This will help identify your business’s goals and objectives and the strategies and tactics you will use to achieve them. This process will also help you identify any potential roadblocks and the resources that you will need to overcome them. Your business plan will also indicate the areas of your business that could best benefit from the funding while also exposing areas that you may want to restructure.
2. Financial Analysis
Secondly, you will want to conduct a thorough analysis of your business's current finances. This should include creating pro forma financial statements, such as a projected income statement, balance sheet, and cash flow statements. This will give you a clear picture of your projected revenue, expenses, and cash flow, which will help you determine how much funding you’ll need to cover any shortfalls.
3. Minimum Funding Required
This is where your analysis from step two comes into play, based on this you should have a good sense of how much funding you’ll need to cover fixed costs and keep your business operational. This number will be your minimum funding required.
4. Estimate Your Ideal Funding Level
Once you have the minimum funding required, you can start to consider how much additional funding would be ideal for your business. Consider things like growth plans, marketing expenses, and new product development. This will give you an idea of how much funding you should aim for but it is paramount that you do not set your sights too much higher than what you need. You want to avoid drawing too much, leading you to be further in debt than you or your business needs to be.
Weigh Your Options
Now that you have a clear business plan that details the funding that you need, it’s time to go shopping. At this stage, you are in control, it’s up to you to decide what type of funding you need and who you want to obtain it from. Looking for funding can be daunting but deciding which funding option you want to proceed with first will greatly help you narrow down the best options for you. We’ve created an easy-to-use quiz to help determine which funding type is best for you but below is a quick pros and cons list for options that may be available for you:
Type of funding | Pros | Cons |
Business line of credit | Quick approval, no collateral required, offers great flexibility to borrow as little or as much as needed, conveniently allows businesses to access funds quickly and easily without having to reapply. | Revolving accounts, interest rates can sometimes be high, some may have a low credit limit (depending on the lender). |
Short-term working capital | Flexibility to respond to unexpected opportunities or changes in the market can be obtained quickly, and access to capital on hand to pay for immediate expenses. | Often more expensive than long-term capital, higher risk of default if not paid back on time, and provides a set or a limited amount of funds. |
SBA loan | Longer repayment terms, lower down payments, and higher loan limits. | Lengthy application and approval process with lots of documentation required, stringent eligibility requirements, high fees, and limited choice of lenders. |
Government grants | No repayment is needed, targeted towards specific industries, or business activities, and can help with startup and costs. | An extremely competitive and arduous application process, stringent eligibility requirements, and they are tied to limited funds. |
Venture capital | Large amounts of capital available, experienced investors that can bring a wealth of knowledge, and access to wider networks of contacts, partners, and potential customers. | High equity dilution, loss of control, short-term focus on return on investment, and can come with some very large risks that may not help your business. |
Once you’ve determined what option is best for you it’s time to start looking for providers. Ensure that you are doing thorough comparisons when looking at lenders and don’t be afraid to get on the phone and talk to who you will potentially be working with. Ask questions, explain what you need funding for, and check for any red flags. (link to red flags for alternative lending Forbes post is published by that point in time). You want to ensure that you select a reliable partner regardless of the funding method that you choose.
Read, re-read, re-read again
Have you ever been on a webpage and quickly agreed to the terms and conditions without thoroughly reading them? It goes without saying that this is the opposite of the approach that you want to take when signing on the dotted line for business funding. Surprises can be fun, but never if it jeopardizes you or your business.
You should approach documents and contracts with circumspect consideration to ensure that you and the interests of your business are always protected. Be aware of hidden fees, interest rates, repayment terms as well as any late fees or penalties. If something in the contract doesn’t agree with you or you don’t understand then reach out to the lender so that any and all qualms are resolved then and there.
How will funding affect the future of your business?
This is where the considerations come full circle. You didn’t start your business without a plan for the future, there is a goal down the road that you are driving towards. Take your business plan, your chosen funding option, and the contract and ask yourself the difficult question, will this funding option provide me with the resources needed to achieve my goals or will it set me up for turbulence down the road?
This isn’t an invitation to second guess any decisions that you have made but is more of a final consideration to ensure that you do not hang an albatross around the neck of your business. No article gets published without an edit, no song is released directly after it's been written, look at this as the final edit or review before proceeding.
Empowered decision-making with Backd
These considerations should empower you with the knowledge to make the right decisions for your growing business. If you need working capital or decide that a business line of credit is the best option for your business then Backd is here to help! Our team is always more than happy to answer your questions and our application only takes 3 minutes to complete. Get the funding that you need today, give us a call at (737) 256 7458.
