You may already have most of what you need to start your dream business – a great idea, a hungry audience and copious amounts of research, but the one thing that may be holding you back is a lack of capital. Put simply, capital is the money you need to finance your business. Without it, your great idea will go nowhere fast. Here’s what you should know before you apply for that business loan.
One of the biggest reasons a small business startup will fail is because they undercapitalize the business right from the start, or in the crucial early days, and run out of money before the breakeven point – the point where your sales equal your expenditure each month. The only way to raise the right amount of capital is to take a realistic look at how much money you will actually need to run your company until you hit the breakeven point.
Ask yourself these questions:
- What do I need to make my product/run my service?
- Where will I run my business?
- Have I accounted for any seasonal fluctuations?
- What services do I need? (Accountants, staff, etc.)
- What equipment do I need?
- How much do I need for incidentals?
- How long will it be before I realistically make a profit?
These questions will help give you an idea of the amount of capital you need to raise so that you can give your small business the best chance of success. You may not be able to make exact figures, but you need to have a good idea before you can move forward.
Another thing that is very important to do during this stage is to make sure that you write all these figures down and go into as much detail as you can. When it comes time to secure start up capital, or continuing capital for your fledgling business, you need to have a solid business plan that is well thought out and is as comprehensive as possible. You will not be taken seriously as a business person without one.
As part of the plan you will need to show how much capital you already have access to. This can include things like:
- How much money you can access from personal funds
- How many assets you already own that can be used for your company, and if your business is already running, how much profit it makes
- The details of family, friends or acquaintances that are willing to invest in your business
- How strong your personal credit rating is, and any other lines of credit open to you
The most common form of small business funding is bootstrapping, or funding the business out of your own pocket. Research by the Small Business Administration (SBA) found that 75% of most small businesses are self-funded as their primary source of capital, and 87% overall have sunken some personal money into their company. This is not a quick and easy route to raising enough money to realize your dream because the research also found that 4 out of 5 small businesses had experienced a serious gap in cash flow that had caused major problems, and bootstrapping increases your chances of that.
For any type of funding, aim to raise at least 25-50% of the capital from your own funds. Coupled with a good credit rating, this shows investors that you are able to manage your money, are invested in the venture and are willing to put in high personal risk to make. 25% of your companies capital may take all you have; be ready to give it.
For most small businesses there comes a times when you have too much month left at the end of your money, so you have to seek out alternate sources of financing. There are many options to consider, each with their advantages.
Traditional Bank Loans
This is the first place people turn to when they are looking for more finance. They have access to different types of financing and are local. This is a big ‘plus’ in workability, but also a big minus.
A traditional bank loan has a very definite set of criteria for success so securing a loan is not easy, but add to that the fact they are tied to the banks products, and no others, you may go through being accepted only to find that there isn’t a good fit for your financial needs.
Standing up in front a group of people and detailing your company is a big part of any fundraising. You have to be persuasive and confident, as well as being able to answer an array of tough questions about your business and your business plan. Venture capitalists and angel investors have different requirements and each needs to be investigated before presenting to them.
Crowdfunding has become popular as a way to finance a business recently, but, again, you have to make sure that you are pitching at the right audience. Each platform has different rules ranging from taking a large percentage of the money you raise to returning the money to investors if you do not reach your goal.
Online lending has become a quick and easy way to raise capital for your business, as it gives you access to a vast array of financial products and are administered quickly. Check your interest rates and terms and conditions, but most are comparable to a bank loan with the much added benefit of being accessible when you need them.
What do lenders look for?
- All types of financial providers will look for the same things:
- A solid business plan
- Cash flow – the ability to pay the money back to terms
- Collateral – the value of your assets you are willing to commit as an assurance you will repay the loan
- Commitment – How much money you are willing to put into the venture
- Character – This will include your personal credit score and financial history so that they can gauge your character. A low credit score will seriously affect your chances of funding
Take the time to make sure you are prepared for raising capital for your business, be meticulous with your detail. You have to ensure that you are so well presented that they have no reason to say ‘no’, then you will have access to all you need to run your small business successfully.
The Credit Agents have experience in helping small to medium sized businesses navigate the process of acquiring funding to help them grow.