At some point in the growth cycle of most businesses, they need access to funds for payroll, capital investment, stock on hand, expansion or rebranding. However, there are a lot of criteria that determine what type and how much funding a business is able to draw.
Have a business plan that incorporates your funding.
One of the first things a business owner does is to develop their business plan. Business plans include the current financial situation, plans for the operation, future expectations and needs, and assumptions about earnings and return on investment. In the funding environment, this plan allows the borrower to best present their needs and goals to the broker and lenders, helping to demonstrate the business is a sound investment.
The business plan explains why the business need capital, how the funds will be used and how the investor or lender will be repaid. Detailed plans help businesses target funds to the right place, reducing the risk of over-borrowing, or becoming “over-leveraged,” which can make repayment difficult and reduce a businesses’ credit score.
Business plans need to be realistic. Lenders will look for unrealistic expectations, based on the premise “if it looks too good to be true, it probably is.” Make sure the expectations in your business plan match what lenders will be willing to provide given your position in the market and the service and products the business provides, both in the amount for the loans and for the expectations of return on investment. A business plan should show why those goals are not only possible but probable.
Know what type of funding you need
Understanding the different types of loans available will help in picking out the best fit for your needs. A broker will understand which best suits your business’s needs, but knowing the basics can help a lot. Additionally, how you will apply the capital can help in identifying and applying for the right type of financing.
Lines of credit, invoice factoring, and SBA loans will each apply to specific situations based on the company’s finances, the industry they work in, how the funds will be used, and the size of the company. For example, SBA loans have specific requirements for what qualifies as a small business, while invoice factoring will require invoices with clients who have strong credit. Factoring works best in industries where invoices commonly take 60+ days for repayment and allow the business to access that cash now rather than waiting for future payments.
Real estate loans will come in a variety of forms based on what type of property needs financing. Property purchases, construction on previously owned land, or development loans will each have their own needs and requirements. Equipment financing will also have a variety of loan types, each of which will have their own requirements.
Know the legal responsibilities you will have to lenders and investors.
The business owners will sign a contract with the lenders. As with any contract, there can be problems if the requirements are left unfulfilled. Failing to fulfill your legal responsibilities can lead to loss of collateral, impact your credit score, incur fees or bankruptcy and even lead to business closure. Knowing the exact terms of your agreement with lenders or investors can prevent undue headaches and help prepare for proper repayment.
Seeking funding can be a job unto itself. Knowing what type of funding your business needs, the available sources of funding, and how to best manage debt can help make the process less daunting. Our team is here to help walk you through each of these preliminary steps, connect you with funders, and set you on the fast path for financing.