Is growth financing a good idea for my small business?

Growth financing for a small business has to make sense with your business goals as well as its ability to meet the borrowing obligations. The signs are encouraging as the market you are in is experiencing growth or your complementary service or product is boosting your sales.

While they are positive indicators, growth financing comes with its own challenges. It’s advised that you take the time to sit down with the following questions as you consider getting a capital injection.

Question #1: What’s the most relevant type of financing do I need?

Borrowing to invest in your business growth is a good thing but does it make sense with your business profile and what you are trying to achieve in the short and long terms? Is it helping you build a sustainable growth or adding more than you can handle at the moment?

Capital borrowing always comes with additional responsibilities. Such as making sure that the business does grow to be able to meet the obligations. Therefore, picking the right type of financing that matches your current business performance is the most important prerequisite to growth financing.

A long term loan does not make sense for a short term project in the same way merchant cash advance doesn’t make sense for a manufacturing business.

Question #2: Is my pipeline healthy?

One of the primary attributes considered by lenders to qualify for a loan is the ability of the business to create and maintain a strong monthly revenue stream. This ranks highly in lenders book as it provides assurance of continuity with your business as well as having the ability to meet the borrowing repayments on time.

Remember that your revenue stream will fluctuate but does it point towards an upward trend? What are the things that drive or drag your revenue? Are they within or outside of your control? These are the questions that would help you see if you have a healthy pipeline.

Question #3: Can I handle additional business?

If and when growth kicks in, it should be within the calculated perimeters of your growth strategy. To ensure that you have adequate manpower, updated software and hardware, and relevant marketing efforts to create sustainable growth.

Subsequently, it’s important to test if your business is able to meet the additional demands. In the initial stages of growth, things might seem manageable but can you continue with the same capacity as growth kicks into high gear?

Question #4: Where is the money going to?

Having a detailed plan to manage the borrowed funds will save you 100% of the headaches later on. It maps out the investment options worth considering, how much you will exactly need, the calculated ROI from the investment, and allow you to set aside a rainy day fund.

The existence of a detailed action plan also encourage your lenders to offer the loan that will meet your needs if not more.

Question #5: Do the numbers make sense?

Numbers tell you exactly where your business is and what it is able to take on. When you do the calculations, the cost of borrowing should make sense with the anticipated ROI of the business growth. It should show that sustainable growth is more than possible and there is continuity as a result of growth financing. Factors that should be reflected by the projected monthly revenue, and ability to meet repayments.

Small businesses often fail because they are unable to expand and achieve the growth necessary to sustain their longevity. Others however, failed because of their aggressive growth strategy when it’s not time to capitalize on growth. Recognizing the numbers and having a detailed plan allows you to confidently take on growth financing and make the loan application process much smoother.