Growth financing for your small business has to make sense with your business goals, needs and your business’ financial ability to meet the debt obligations. You might see that the signs are encouraging such as consistent growth of your revenue and the market you are in is expanding.
While the signs are positive and you are confident that you can take on the obligations, keep in mind that growth financing comes with its own set of 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 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: How is the money going to be spent?
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 will tell you exactly where your finances are and what kind of loan it can take on. When you do the calculations, the cost of borrowing should make sense with the anticipated ROI of 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 the 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 their aggressive growth strategy is bringing additional business before your business can handle it. By understanding the numbers involved and having a concrete business plan, you can instill confidence in your lenders and make the loan application process much smoother.