Determining Your Business Needs Before Shopping for Financing

For those who have started their own business, growth is a primary consideration. After all, no one gets into business just to get by. Instead, they are looking for ways to increase business, both in terms of marketing to increase sales and by increasing investments of capital. Yet to achieve both, you need to have a good handle on what your financial needs are for your business as it grows. This article will discuss the importance of understanding and determining your business needs before you start shopping for financing.

Assessing Your Financial Situation

While your company may have reached a stage where an infusion of capital is necessary, there are multiple ways to achieve that investment. One of them is through a business loan, which could be a small business loan with the SBA serving as the guarantor. Thus, they take on a portion of the risk if your business were to default. Therefore, you will want to look at your current cash flow. What type of payment could your business reasonably handle?

You could also opt to take on an investor, but if you do, then you will be responsible to them for a return on their investment. Consider that you are taking on a temporary shareholder who may have an opinion about how you are handling the business itself. Or they could choose to loan you the capital investment, but at a slightly higher interest rate than more traditional loans.

If you are looking to purchase additional equipment or specific software, then can you do so on your current cash flow or are you going to need an infusion of capital? For those that will need additional capital, it is important to determine the best source for that capital. There are loans that may be effective at a lower interest rate than using an investor. However, if you are struggling to meet all your obligations on a monthly basis, because your cash flow is uneven throughout the year, you may need to get an infusion of working capital to give you a cushion to deal with the working capital issue.

Another point to consider is how urgent is the capital needed for your business? If you are looking for money under pressure, you might find it difficult to secure funding at a reasonable interest rate. It can also be more difficult to get a loan or investment if your business is trouble. Therefore, you want to anticipate the needs of your business as much in advance as possible, so that you can secure financing or capital ahead of any financial shortfalls or slow periods.

Understand Your Risk

When it comes to determining risks, your lender will have their own specific categories that they use to define if you are a high lending risk or not. Additionally, all businesses carry a certain amount of risk. The question for most lenders is how much risk you are carrying and how that degree of risk will affect your ability to pay back their loan. Additionally, the amount of risk that you are carrying will affect how much your business can borrow and how much the loan itself will cost in terms of your interest rate. This will also make you eligible for different types of financing options.

One of the reasons that most businesses need infusions of capital is during times of transition. Some of the biggest transitions are during the startup phase and periods of growth. There is a sense of urgency when you see an opportunity to take your business to the next level. Therefore, you will want to work in advance of those potential moments to work with your local personal business banker to be prepared for those moments. This could include going over the type of information that they will need for a commercial loan application, as well as taking the time to examine your financials to let you know what types of financing options you qualify for. Working closely with your personal banker, you can assist them in determining your risk level based on their criteria.

Understanding Your Industry

The reality is that the state of your industry can also impact your ability to get funding for your own business. If the industry is depressed or in a state of decline, lenders are less likely to want to lend funds to your business, because it is now at a higher risk of default based on its industry as a whole. On the other hand, if your business can thrive during tough economic times, then it is likely to receive better funding terms.

Additionally, if your business is seasonal, then you may find that you qualify for smaller loans with a shorter maturation period. These loans are typically made to assist a business through its slow or depressed periods. Therefore, it is important to know your business and your financial needs prior to seeking out financing options.