Funding your business is very important in your business journey, but it can be a little tough to navigate. There are a lot of considerations to be made in business funding and as such the process can trip up entrepreneurs.
In addition to raising capital being difficult to almost impossible for most businesses, you also need to consider;
- What business funding options are available for your needs
- The cost of capital you’ll have to pay
- If your business will remain profitable when these costs are added on
- What business funding is best aligned with your business goals
- The impact of business funding on your business’ success
Despite the difficulty of raising business funding, there are a lot of funding options to look into as an entrepreneur. Each one has its own requirements, processes, chances of success and so on.
With that, you need to have a strategic approach to accessing funding for your business. This is a strategy you should develop from the very early stages of your business, and adapt as needed.
This is why we always include a comprehensive financing section in our business plans. We encourage you to do the same when you plan your business. Not only does it show potential funders you are aligned with their funding philosophy, but it’ll also help you get the right business funding at all times.
So with that in mind, let’s explore how to get the right business funding. This is a process that can be applied at any stage of your entrepreneurial journey. It works just as well when you are looking to start your business, run it successfully, or when you are looking to grow your business.
1. Business Funding Need Assessment
You should always comprehensively asses your funding needs before you get started in accessing business funding. You might be thinking duh, that’s rather obvious, but many entrepreneurs overlook this important step.
This can mean overlooking it completely or not doing it comprehensively enough. And the challenge with this is when you under-fund or over-fund your business. The business funding you get can do more harm than good.
So at the risk of overstating the obvious, spend a lot of time on the assessment of your financial needs. Get a complete picture of your business funding needs, preferably over a year to five years.
To get started with your funds need assessment, start with identifying the area of your business that needs financing.
- Are you starting out?
- Do you have an opportunity you want to take advantage of?
- Do you have a short-term cash flow problem you want to bridge?
- Are you looking to grow your business?
Once you identify your point of need, it’s time to gather data. You need to analyse data to make an informed decision on your exact funding needs. What are the expenses you will incur and what is the timing of those expenses?
What income will you generate in that time and can any of that income be retained to fund your needs? Ideally, a well-conducted funds need assessment will allow you to borrow only the exact amount that you need at any given time. Nothing extra.
The lesser the amount to borrow the more manageable the cost of capital. Also, borrowing smaller amounts opens you up to more funders.
2. Assess Funding Options
The business funding landscape continues to evolve. From the very first interest-based business loans in ancient Mesopotamia to modern systems, a lot of funding organisations and types of funding have emerged.
Thanks to emerging technologies like cryptocurrency and the growth of economies, this diversity won’t stop. While this has greatly improved access to business funding, it’s given a lot more homework to entrepreneurs.
I cannot over-emphasise the importance of choosing the right funding for your business. The right funding source will affect your ability to get funded. Different sources have different qualification criteria, and approaching the wrong one is an automatic dismissal.
Criteria can vary from factors specific to the business owner to factors affecting the business itself. This can include age, gender, location, industry, size, income and much more. All of this must be considered to avoid wasting time applying to funders who won’t consider you.
In addition to affecting your chances of getting funded, the right funding source can influence the success of your business/ project. Matching the right funding to the right business/ project is a key success factor. So with that in mind, what considerations should you make when assessing funding options?
When you seek business funding, there are 2 main options you’ll have to choose from. Firstly, you have grant funding, business funding you are generally not expected to pay back.
This is usually offered by Governments, Government departments and local governments. Public organisations. However, private companies have also been known to offer these, especially as part of mentorship and supplier development programs.
Secondly, you have business funding you will have to pay back, usually with some form of interest. This type of business funding is offered by both public and private sector players.
Public sector funders tend to charge less in terms of interest for their funding. As a result, you may want to consider public sector funding first, but it does carry its own disadvantages.
Firstly, because it’s so desirable, it can be very difficult to access this funding. The competition is too high. Secondly, it does tend to be stricter in terms of qualification, and a lot of funding options may be beyond the scope of your business.
Generally, you will want to have the following prioritization for your funding type;
- Grant funding that your business will not have to pay back.
- Affordable funding that is usually provided by the public sector which has long payment periods, payment holidays and low-interest rates.
- Standard financing options that are available from the private sector.
Ultimately the choice you make will depend on what options you were given. Just make the choice based on the order given above if more than one option is available.
2.2 Timing of Business Funding
The timing of your business funding needs is 2 fold. Firstly, it has to do with when you will need the funding, and secondly, how long you will need it for. Both these factors need to be managed well with good business planning.
Just like the amount of business funding needed, these 2 factors can affect your ability to get funds. The longer you need to borrow, and the more urgently you need funds, the fewer options you have to borrow from.
Also, the more cost of capital you will incur increases with loan duration and urgency. More affordable funding options tend to have long turnaround times. So plan carefully.
Not only should you always stay ahead of your funds needs so you have ample time to look for funding, but you should also always make sure to access funding for the least period possible to reduce the risks associated.
When you have established the timing of your business funding, you need to match the right funds to your needs. You cannot, for example, get a long-term loan for invoice financing.
Not only will your business be saddled with repayments long after your project is complete and paid, but it could also be so pricey it could possibly render your project unprofitable.
Like many factors in business funding, matching your needs to the right option will affect the viability of your business or project.
2.3 Cost of Business Funding
The cost of business funding is a huge deciding factor, particularly for small businesses. If the cost is too high, it can render the opportunity you want to pursue unprofitable, worsen the problem you want to solve or stunt the growth of the very same business you want to expand.
This is why it’s important to assess all the factors that affect the cost of capital, many discussed here. This will help you choose the business financing that costs the least for your business.
This will also mitigate the risk of failing to pay in addition to making you desirable to a broader list of funders. It’ll also put less pressure on your project or business to generate revenues and cash flows, greatly increasing your chances of success.
Always put a threshold on the cost of funding you are willing to accept, and calculate this cost comprehensively. Avoid being forced into desperate decisions. No matter how desperate the situation is, overpriced business funding will do more harm than good. Leave it.
2.4 Application of Business Funding
What exactly do you want to use your business funding for? This is an answer you should never generalise when looking for business finance. As is the theme with most of this post, matching your need for funding to the right source is very important.
Even when you have multiple needs, try to separate them and asses if they could be better served by an individualised approach to funding. Look at your needs and ask the single question that will lead to the right funding source.
Example questions may include;
- How can I fund my idea and turn it into a successful business ( for entrepreneurs starting a business)?
- What is the best option to finance this invoice until it gets paid (bridging short-term cash flow problems?
- How can I fund the purchase of an important piece of equipment?
- What is the best option to fund the growth of my business to the next stage?
- What options do I have if I need to explore a potential opportunity?
As you will see when we discuss considering alternative funding options, these questions may have very different answers. Exploring your financing needs individually opens more opportunities to meet those needs.
There could be ways to finance equipment purchases that are not available for invoice financing or start-up finance. Once you figure out what you want to fund, you’ll have more options to fund it.
2.5 Qualification for Business Funding
Though already touched on, this is an important part of assessing your funding options. Simply put, there is no need to approach an option if you don’t qualify. It’s waste of time and effort and might just demoralise you unnecessarily.
So when compiling a list of your funding options, go through their terms first. Conduct thorough research into what’s required of you as the business owner and from your business.
A lot of funders will have this clearly outlined. Usually, this information is on their website. Additionally, funders have different funding products. Be sure to investigate their full catalogue. You could find a product that you qualify for despite falling short of the rest.
3. Implications of Each Funding Source
With all the business funding sources to choose from, it follows that they are not all created equal. No matter how nuanced the difference is, no 2 business funding sources can be the same.
You are unlikely to find a business funder that stands at the extreme of each business funding type. No one lender is exclusively grant funding, except perhaps government funding, but as already discussed this is very difficult to access.
As such, most funding vehicles are some hybrid of grant and paid funding. This could be through reduced funding costs, payment holidays, small business considerations, and much more.
As a result, a specific funding vehicle from a specific funder will be unique. Take, for example, your business banker. While many have short-term business loans, these have very varied terms across banks.
Even invoice financing is subject to a lot of individualised requirements from funders. Typically, terms from funding sources include qualifying criteria, cost, collateral, payback periods, time to availability of funds, penalties (late and early payment penalties), down payments, balloon payments, monthly instalments, maximum funding available, time to first payment, the application process, required documents, funder’s flexibility, and any added perks and benefits.
Expect these to vary per lender and the funding product you are looking at. And yes, some funders will actually penalise you for paying off your funding early! Choose the package from the lender that has the best combination of these factors for you.
4. Alternative Business Funding
Business funding often requires an entrepreneur to be flexible in their approach. In addition to the traditional sources of government, banks, family and friends, personal funds and any derivative of these, there are a lot more ways to finance your business needs.
Small business owners may need to consider these as traditional options may not always be available to them. You can, for example, take on a business partner to try and grow a business.
They may not only bring capital but skills as well to the table. A lone email marketer can bring in a web developer to enhance her digital marketing offering if there is an opportunity. This does not bring in money, but it does facilitate growth.
In a way, it finances growth. It could even work out better than getting a loan to hire and pay a qualified web developer. But as always, assessing the implication of using any funding source is important.
In this instance, our email market may need to be willing to give up some autonomy in how she operates. But whatever stage of your business you are at and whatever you may be looking to fund, there are alternative options to traditional funding worth looking at and you should consider them.
5. Frugal Business Models
Frivolity and business never really work well together but this is most true for business finances. When it comes to managing your business finances, you should exercise strict discipline. This is even more important for business funding.
Nothing invites failure faster than accessing business financing for frivolous needs. We have even explored how in certain circumstances, access to business funding may be a catalyst for failure.
We truly believe in this stance at Mut-Con. Our clients’ businesses are built to be as lean as far as their needs allow. We even explored how to successfully get started with your business with limited to no funds. The bootstrap method.
Before you even consider business funding, make sure you are running a lean start-up. Be sure to trim the fat. This not only ensures your business can generate revenue to pay back what you borrow, but it also makes you a desirable funding option.
Match your revenue to expenses as much as possible. Identify your largest cost centres and look at ways to cut them down without reducing the quality of your products and services. Make sure most of your expenses are as variable as possible.
In this way, you can fund your operations from revenue as much as possible. An example would be staff costs, one of the biggest fixed overheads for a business.
Entrepreneurs can make them more variable by employing options like white labelling and contractors. The more frugal you make your business, the better your chances of finding growth and success.
6. Align Growth with Available Funds
A good business funding needs assessment should help you to get the right business funding at all times. Along with the other steps we looked at, it should minimize the risk of accessing business funding while maximizing the benefits.
Or, at the very least, help you meet your goals. These goals do however need to be aligned with best practices when it comes to business funding. Aggressively pursuing growth on the back of poor funding strategies is always a recipe for disaster.
Pursuing growth is a closed-loop process. You should pursue growth when you have the right type of funding to do so, but your growth should also be informed by the funds available. Simply put, not all growth opportunities are feasible.
Not in the short run anyway. They may become more accessible as circumstances in your business change, but not always. Prioritise goals and opportunities that can be achieved with not only what’s available, but also what your business can sustain.
Growth without considering sustainability has been the downfall of many entrepreneurs. Because even growing businesses can fail.
Business funding is an inevitable question for any entrepreneur. In addition, failing to land the right business funding can lead to your business’s failure. That’s why we have crafted a handy guide to help you get the right funding for your business.
You should be able to use it to stay on top of any funding needs at any stage of your business. For any additional help with your business funding, you can always contact Mut-Con.