A Condensed Guidebook to Help You Raise Financing for Your Business
Most small and medium-sized enterprises often need access to capital through business financing. Even large-scale companies may look for capital infusions to meet short-term goals. Small and medium-sized enterprises need to find a reasonable funding model. Utilizing the wrong source for business financing may result in the loss of a part of the company.
Some firms also experience challenges relating to repayment terms with improper business financing. Most companies with such problems often have issues with their growth in the future. Funds from business financing may be useful in hiring additional employees, equipment financing, paying for an office, and purchasing equipment.
As a business owner, there are several imperative reasons why obtaining business financing will help your venture. Here are some significant points to note:
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Understanding Business Financing
Most small and medium-sized enterprises often need access to capital through business financing. Even large-scale companies may look for capital infusions to meet short-term goals. Small and medium-sized enterprises need to find a reasonable funding model. Utilizing the wrong source for business financing may result in the loss of a part of the company.
Some firms also experience challenges relating to repayment terms with improper business financing. Most companies with such problems often have issues with their growth in the future. Funds from business financing may be useful in hiring additional employees, equipment financing, paying for an office, and purchasing equipment.
Importance of Obtaining Business Financing
As a business owner, there are several imperative reasons why obtaining business financing will help your venture. Here are some significant points to note:
“Beware of little expenses; a small leak will sink a great ship.” ~ Benjamin Franklin
Beginning Capital
Every new business needs a method of creating and delivering products or services. Business financing is imperative to source the funds for those processes. Most business owners choose between debt and equity financing. For small enterprises, loans help owners have control over the company, but entail certain financial obligations.
Debt Ratios
Proper business financing from the appropriate source helps in minimizing debt ratios. During business operations, there should be more revenue and assets compared to debt, unless this leaves the company with more challenges when completing loan payments. When sourcing for business financing, a bad debt ratio can also affect a firm's ability to attract investors.
Staying Ready for Business Cycles
Proper business financing helps prepare a venture for rainy days or bad economic cycles. Note that smart businesses need to prepare for poor economic cycles also by making good investments, and having good credit, cash savings, and real estate arrangements.
Chance for Growth
Business financing provides a chance for greater success. Companies procure more finance to make investments, acquire new capital, and handle staff and inventory challenges. Some ventures consider equity capital from a venture capitalist. Overall, it's vital to analyze the available funding sources that wouldn't hinder financial growth.
Ensuring Strength of Payroll Accounts
Weak payroll accounts cause loss of staff, which can ultimately lead to liquidation. Business financing enables ventures to have enough funds to handle labor costs. It's advisable to consider having adequate funding to cover two payroll cycles.
Types of Business Financing
For proper assessment of your business sustainability, it's imperative to know and comprehend the different types of business financing. Many firms turn to traditional bank loans as their financing choice. However, the application process may be slower and more difficult. Here are some significant business financing types to consider:
Equity Financing
In equity financing, the investors are owners of the business to the extent to which they invest. It typically consists of finance brought into the venture by shareholders or owners. Investors in equity financing are "angel investors" or "venture capitalists."
Venture capitalists are usually firms, not individuals. These companies typically consist of accountants, lawyers, and investment advisors. In most cases, these firms also deal with large investments – above $3 million. Hence, the process can be complex and slow.
Compared to venture capitalists, angel investors are rich individuals who intend to invest small amounts in a product. These wealthy individuals move fast and prefer simple terms.
Benefits of Equity Financing
Here are some upsides to funding your business through investors:
Safety in Bankruptcy: There's no obligation to pay back if the business goes bankrupt. Investors are partial owners, not creditors. Hence, if the venture goes into liquidation, owners don't need to make any repayments.
No Monthly Payments: Since there are no monthly payments, the venture has more liquid cash on hand. More liquid cash often helps with handling operating expenses.
Investors are Patient: In most cases, investors understand it takes time to build a successful business. Hence, they don't apply unnecessary pressure on business owners to see the products thrive.
Downsides of Equity Financing
Here are some major disadvantages that come with equity financing:
Partnership: Equity financing involves giving a portion of the venture to investors. The higher the investment, the more of a stake the investor wants. Sometimes, investors may get up to 50% of the company.
Dependent decisions: Business owners need to inform investors before making any crucial decision in the company.
Debt Financing
As the name implies, debt financing involves sourcing funding from a lender. After borrowing the money, lenders often require repayment at a predetermined interest rate. This type of business financing typically involves a bank.
For businesses in their early stages, banks check the business owners' credit. Banks also check other sources for ventures with more complicated structures. Before giving the loan to a corporate structure, banks may check the books and review the business’s credit history. For this reason, it's advisable to ensure that all records remain organized. Once the banks approve loan requests, they set up payment terms, including the appropriate interest.
Benefits of Debt Financing
Here are some of the advantages of financing through debt or loan:
No ownership: Since the lending establishment has no ownership of the company, it has no control over the firm.
Short-term Relationship with Lender: Once the business pays back the loan, it has no relationship with the lender anymore. Note that this is important for ventures, as they typically become more valuable.
Suitable Interest Payment: In debt financing, the interest is tax-deductible as a business expense.
Better Planning: Business forecasting models can include a breakdown of the monthly payment and other expenses.
Downsides of Debt Financing
Some downsides of debt financing for small and medium business owners are:
Capital inflow may not be certain: For small businesses, the capital flow may not always be predictable, which ultimately affects payments.
Recessions affect small business lending: It's more difficult to get debt financing in tough economies. Ventures may need to be significantly qualified.
Steps to Business Financing
For proper assessment of your business sustainability, it's imperative to know and comprehend the different types of business financing. Many firms turn to traditional bank loans as their financing choice. However, the application process may be slower and more difficult. Here are some significant business financing types to consider:
1. Identify Financial Needs
The first step to successful business financing is knowing the current financial needs of the company. The common expenses include financing operations, making a major investment in equipment, and dealing with certain initial expenses.
Most new businesses secure business loans for expansion by opening new locations or increasing the scope of their current one. Other common reasons for taking out loans include boosting working capital, building inventory, and conducting renovations.
2.Understand What Lenders Assess
As a business owner considering debt financing, prepare for what lenders assess. Some of these assessments are around character and credit history, collateral to secure the loan, and cash flow history. Ensure you have a credit report for the business to facilitate easy approval.
If you're considering equity financing, ensure the business understands the steps to attract investors. Some points to consider are ensuring you comprehend the market, knowing there's a chance for scalability, and staying transparent.
3. Understand Debt Financing and the Necessary Requirements
Source the necessary documents before heading to the bank (if considering debt financing). Such documents include:
Tax returns
Personal financial statements
A well-prepared business plan
Monthly cash flow projections
4. Submit the Application
If it's debt financing, submit the loan application to the lender and follow up for more information. It's important to know the status of your application.
Resources to Help You:
- Financial Forecasting Tool: Assess your financial readiness.
- State's Gov site: Each State has unique regulations for business structure.
Take Action:
Evaluate your business's readiness. Download our comprehensive 'Business Mindset Checklist' and ensure you're on the right path.
Factors to Consider When Financing a Business
Short-term and Long-term Goals
Short-term goals help a business achieve its long-term goals. They also ensure the venture stays motivated over time. Regarding long-term goals, business owners need to ask the following questions before diving into business finance:
What's the business’s purpose?
What are the future goals for the business in 5, 10, and 20 years?
Present Interest Rates
Before a business owner decides to choose debt financing over equity, it's important to consider interest rates. Access to low-interest rates or SBA loans and other specialty loans makes borrowing cost less. It's crucial to compare all the interest rates from different lenders before making a final choice.
Control/Ownership
Before choosing equity financing, business owners need to understand that they are giving up a part of their company to investors. If owners are ready to relinquish part of the company, it's still advisable to give no more than 49%. With 51% ownership, it's possible to outvote the other party.
Requirements to Borrow
Ensure you understand the different requirements that lenders look out for when issuing a loan. These requirements include:
Debt-to-equity ratios
Fixed monthly expenses
Business plan
Business Structure
The pre-existing structure of a business can affect its chance of securing a loan. For instance, businesses structured as partnerships complicate selling equity. Owners who plan to secure their equity finance via public means may need to declare the business a public corporation.
Repayment Terms
Ensure the repayment terms for the loan suit the business. For instance, some loans don't require any payment for years. In such a case, consider:
The average total interest rate
Time value of money
Final Thoughts
Business financing ensures a venture has sufficient funds to spend, operate, and invest appropriately. Sufficient funding encourages business growth by granting access to capital and protecting against bad economic cycles. It's important to analyze which of the methods of financing suits your business (debt or equity), before making the final choice.
Considering the strength of your business finances and how it can impact your growth trajectory?
At Intenovate Inc., our expertise isn't just about knowledge—it's about application. We're committed to ensuring your business doesn't just grow, but thrives in the most challenging landscapes. Let us be the catalyst behind your success, helping you lay a robust foundation, strategize your expansion, and keep your business on a trajectory toward consistent profitability.
Disclosure:
The insights and recommendations provided in this series are based on extensive research and experience. However, every business is unique, and outcomes can vary. For a more personalized approach, consider reaching out to our team. This article is not intended to be legal or financial advice.
For those who prefer auditory learning or have accessibility needs, we're pleased to offer an audio version of this article. At, Intenovate Inc., we believe in inclusivity and making knowledge accessible for everyone.
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About the Author:
Paradise Rodriguez-Bordeaux
Founder/CEO
Intenovate™ Inc. , A Paradise Company™
Best-selling author, entrepreneur, and thought leader.
Paradise Rodríguez-Bordeaux, recipient of the 2023 Innovative Leadership and 2022 Human Rights Activist awards, firmly believes, "Sustainability is the bare minimum." Spearheading initiatives that prioritize sustainable business growth and innovation, Paradise’s leadership at Intenovate™ has been instrumental in guiding the company and its clients toward understanding and solidifying their foundational strengths before embarking on expansion. In the language of being #IntentionallyInnovative, Paradise has positioned Intenovate™ Inc. to be a sound asset for clients; leveraging strategic solutions for sustainable profitability.
Beyond her corporate endeavors, Paradise is a passionate advocate for those who have faced adversity and discrimination. With over 15 years as a philanthropist, she supports organizations championing poverty alleviation and human rights. Paradise firmly believes that "We need to consistently produce effectively efficient solutions. This world, the communities, it's all of our responsibility. Leaders HAVE to lead," encapsulating her vision for responsible leadership.
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