What to Do Before Obtaining Small Business Funding?
October 15th 2019 at 8:16am Published by firstdownadmin
There are various stages in a business’s lifecycle when the owner has to apply for funding, either for a specific capital project or to pay off existing debts. Whether you need to acquire new assets or undertake a new project, you may need to apply for funding.
A small business funding provides emerging businesses with a way out of liquidity crunch. However, there are several important factors that business owners need to consider before they approach a bank or a private funder.
Before applying for a short-term funding, business owners need to think things through. The consequences of making a bad deal are enormous when decisions are not thought through by business owners. To prevent you from making a mistake, we have made a list of some crucial questions you need to ask before opting for small business funding.
Review Your Credit Score
One of the biggest mistakes that small businesses make when getting funding is neglecting the credit score. Since small businesses are not established funders as banks look for your credit history to provide you with a secured business funding.
The credit score is a track record that shows the consistency with which you have met your financial obligations. Usually, the applicable score is 650, but most funders are willing to provide funding only when the score is above 720.
Venture capitalists and funders are providing your business with valuable finance. They are well within their right to look for your credit score to establish the credibility of your operations. These venture capitalists are not willing to assist a company whose track record of paying back credit is poor.
Therefore, before you opt for business funding, be mindful of your current credit score and its value. You should be regularly monitoring the credit score even when you don’t require short-term funding.
Assess the Need for the Funding
The next thing that you need to ask yourself is if you need the funding. Sometimes the poor cash flow of the business can be handled with the help of business funding. As mentioned before you should think thoroughly before opting for business funding because failure to repay debt can lead to a huge risk for the business.
Certain essential requirements that are hindering the growth of the business can be financed with the help of small business funding. For example, if you need funding to purchase an inventory or for the renovation of your coffee shop, then you are justified to look for it. On the contrary, you should stay away from the funding when you need finances to pay for a team retreat or manage an employee party. As a business owner, you should avoid looking for funding for non-essential purposes.
Prepare a Proposal
Lenders and venture capitalists want to know what exactly you will spend their money on. This is why you need to be concise about your long-term plans and the area you are going to be spending heavily on.
Rather than sharing unnecessary details in your proposal. You should highlight how much money you need and how you plan on spending the money provided. Another thing that all venture capitalists providing funding want to know is how you will repay the funding. As a follow up of the question, you should look to encourage the creditors of your backup plan if you are not unable to do so.
Think About the Urgency of the Funding
If for some reason or the other you need money immediately, a traditional traditional bank financing is then no longer a viable option. In such cases, it is recommended to look for alternative funding types, unsecured funding is the best option.
It is highly unlikely to find a secured funding on such short notice. An alternative in such a situation is to look for an unsecured funding. In an unsecured funding, the funder trusts the borrowers promise to pay back. Since these funding have an increased risk involved the cost of working capital for these funding tends to be higher.
While the interest may not work in your favor, you will have the luxury of having the required amount at your disposal.
Consider All Possible Options
Not all funders provide the same cost of working capital and benefits that you are looking for. Before you apply for small business funding, you need to ensure that you are talking to the right funders. As a business owner, you must ensure that the funder willing to provide short-term funding understands the financial needs of the industry.
This is important because the relationship with the funder does not end at the point you receive the funding. A venture capitalist providing commercial funding will ensure that you spend the money lent on the required operations. The funders are also willing to assist you by offering advice and guidelines.
Before you choose a funder for small business funding, you should ask them several questions to determine their understanding of the industry. The questions can vary from the fundings they have made in your industry to the average funding amount they provide.
Also, don’t forget to clarify the payment structure beforehand by determined the required payment schedule. The last thing you want is an increase in the business funding due to interest accumulation on the sum.
Getting a business is a challenging process. Still, innovation in the online process has made online funding a much smoother process. All you need to do is follow the steps above and stay informed when looking for small business funding.