Acquiring a business loan without the correct information could leave both you and your business in serious arrears. So what do you need to learn more about small business funding? Start with these 6 pointers and you will be on your way to successfully funding your business.
1. Start with a number
It’s always a good idea to have a number in mind when it comes to applying for funding. This number isn’t random, nor is it a ‘nice to have’. Rather it’s an amount you have researched in relation to a particular thing you would like to achieve in your business like buying a piece of equipment, negotiating a deal size with a vendor, running a marketing campaign, or doing a renovation. Understanding the intricate Rands and Cents of your requirement will help you nail down what is realistically needed upfront when applying for the loan. It will also ensure that you ask for the correct amount in order to get the job done properly the first time.
2. The main sources of funding are not necessarily what you expect
There are lots of ways to fund your small business: You can use personal debt, commercial debt, approach friends or family, try crowdfunding, or use an alternative funding product like a merchant cash advance. Debt implies that you pay back the original amount to the lender with the agreed interest. Investors, however, don’t require the money to be paid back but will invest in exchange for a percentage of the business. If you opt for an investor, try to find one that brings something more than money to the table like time, access to a useful network, or operational expertise. If you opt for debt, try to find a lender that works well with the niche of your business so that you don’t put yourself under unnecessary stress. For example, a merchant cash advance is specifically designed for retailers and repayments work directly in line with your turnover
3. Traditional loans require collateral
Any commercial loan, say from a bank, usually requires collateral in the form of business receivables, inventory or personal assets like a house or car. There is a pre-requisite of traditional lenders and is used to secure the loan and protect the investor. There are alternative lenders like Merchant Capital for example, who don’t require collateral. These lenders will have their own requirements to fund a business for example they don’t usually work with start-ups and require the business to have been trading for at least 12 months with a minimal turn-over requirement.
4. Self-identify the gaps and weaknesses in your business
If you know where the gaps are, you will be wise to fix them. The best way to use any investment is through growth-enhancing activities in order to strengthen potential weak spots instead of simply plugging holes. This means that the loan used actually grows your business from the inside out. Asking the hard questions about your business from the outset means you will stay a step ahead of the market and proactively anticipate your needs instead of simply responding to them.
5. Understand what requires investment first
Entrepreneurs are usually brimming over with ideas and while this can be fertile ground for opportunity, too many ideas can also cloud judgement and overload your system. Rather focus on the core ideas that will maximise your return on investment. Continuously ask yourself what will strengthen your bottom line, increase your customer base and market your business long term? Then obtain the necessary funding to make these things happen.
6. Not all debt is bad debt
Many entrepreneurs believe that you should only apply for funding when you absolutely need to. This isn’t actually true. There is an important difference between good and bad debt. Bad debt is debt that digs you into a deeper hole or which only alleviates problems temporarily. On the other hand, however, good debt can give your business a much-needed boost when used on the right opportunity at the right time. Further to this, when debt is used well, it builds up a good credit history. Meaning that when the time eventually comes for emergency loan applications, investors will quickly see that you have loaned cash before and paid it back timeously. Meaning that funding applications will be far quicker and more fruitful in the future.
The bottom line
Funding is an important way to build your small business. But before you apply for funding there are several important things you need to know. These 6 pointers will stand you in good stead when it comes to wrapping your head around the world of small business loans and funding; helping you understand who to approach and what to do with the funds to actively grow your business. For more information on how we can help fund your business’s ambitious growth, contact us today.