As a small business owner, you probably aim to grow your business or make it more profitable, however your business might need extra capital to do so. Whether you turn to cash flow, investment or borrowing for that extra capital, evaluate all your different options before diving in. Additionally, it’s important to note that not every financing option suits every business need.
For example, you might be the most familiar with a secured loan from the bank. However, this may not be the most suitable option – especially for a small business.
Take into account both your business’s long and short term needs. While the need to increase your working capital or cover cash flow may seem more imminent, there’s no doubt your business will also face additional capital needs further down the line. These could relate to purchasing a new premises, or large equipment to increase efficiency. Furthermore, consider the potential for unexpected business costs and opportunities to arise as well. By looking ahead you can ensure you have access to capital when they do.
While it’s difficult to anticipate every future capital need, here are our tips to better evaluate your financing needs:
1. Identify the need for capital
Do you need to increase your working capital, or maybe hire new staff? It’s important to identify what it is that your business needs the capital for. Doing this can help you choose the best financing option for your business. Let’s say you need to purchase additional inventory – you wouldn’t want to be paying off a loan months after the inventory is sold. Therefore, by identifying the business need, you can see that a short term loan might fit better than a long term loan.
2. How much capital do you need?
Remember, regardless of which lender you use, there are always costs associated with borrowing. Therefore, borrowing more than you need doesn’t really make much sense. If you’re applying for a loan, it’s important to do your research, as some lenders have application fees, while other lenders, like OnDeck, do not. You can also evaluate the cost of the loan against your expected return, which can help you maintain a solid position on how much capital you actually need.
3. Keep tabs on your credit profile
Familiarising yourself with your business credit score can give you an understanding of the financial health of your business. You can check your business credit score for free with our online Know Your Score tool. Knowing your score can also help you get an idea of how much money your business can borrow. Moreover, maintaining a solid business credit score and profile can help improve your likelihood of receiving the funding your business needs.
4. Be prepared
Make sure you have access to all the information you need to apply for financing. Understanding where your business stands financially can put you in a better position to understand your options. Familiarise yourself with your profit and loss, business bank statements, income and expenses. However, remember, not all lenders require the same information to make a decision. While some banks may require mountains of paperwork, OnDeck only requires 3 recent months of bank statements to start an application.
How you finance your business is an important decision. Take the time to evaluate all your options and to understand which option is the most viable for your business.