Going into debt is practically part and parcel of being a small-business owner.
It’s one of those double-edged swords and necessary evils to growing your business – but if you aren’t adequately prepared and haven’t done your sums properly, you could very well find yourself in a spot of bother.
“Obtaining too much money could lead to the improper use of the additional funds that suddenly become available to the business owner,” says Gerrie van Biljon, executive director of Business Partners, a company that facilitates small to medium-sized businesses. “This money is also very likely to be spent on unnecessary items that will not necessarily improve the position of the business.”
“During the process of establishing what type of funding is appropriate, professional advice is recommended, as not all entrepreneurs are financially orientated or familiar with the financial principals. Sound, professional advice will guide and steer the entrepreneur to the most suited solution for their particular needs.”
Wendy Smith, accounting and financial advisor, and BPaaS regional leader at Deloitte, says the key to improving your chances of getting your finance application approved is ensuring that you do the necessary due diligence ahead of time.
These four questions will help you identify whether you’re ready for this next step.
- Why do I need funding, and is it really necessary?
Smith says you should have a clear understanding of why you require the financing in the first place.
Once you’ve established a legitimate reason that could justifiably pass investors’ strict requirements, take a hard look at your business and consider whether there are areas that aren’t functioning optimally, or areas that are costing you money that you could cut back on to raise the additional capital.
“Be sure you’ve tested and evaluated the basic fundamentals of your business,” Smith advises. “For example, if your selling price is too low or if your expenses are too high, your business may not be profitable. If this is the case, then further funding will be more a burden than a help.”
- Do I have a detailed budget?
A detailed budget enables you to narrow down your request from a broad one to a more specific request, which will increase your prospects.
“It’s much easier to request a specific machine that will give you a carefully calculated output and return on its purchase price rather than an entire factory,” Smith says. “You need to be specific about how you’re going to apply the funds and what the expected return will be.”
- Is this the right time?
No bank is going to lend you money when your finances aren’t in order or if you’re facing cash flow issues, so make sure you have your house in order before you even think about trying to secure additional funding.
“The best time to borrow is when the going is good, and when you have constructed a robust business plan and you have a working business model with a steady turnover and large margin of safety,” says Smith.
“While you wait for your application to be considered, find alternative ways of continuing with your business activities. By demonstrating your ability to be sustainable, it helps build collateral as you continue with business as usual, making you a much safer bet for lending institutions.”
- Am I growing too fast?
Banks and financial institutions like to see that entrepreneurs have invested in themselves first and have some form of vested interest in the growth of the venture, which is why Smith says it’s important to demonstrate that you yourself are invested in the growth.
“The cost of funding exponential growth, which will require a bigger investment in working capital and assets, can sometimes be crippling to a business,” Smith says.