How to Secure Financing for a Business?

How to Secure Financing for a Business?

April 30, 2024 Blog Business Financial Planning 0

Whether you’re planning to start a business or grow one, you’ll need to secure financing to do so. Funds are required to purchase new equipment, replenish stocks, expand or open a new branch, and hire more staff.  

There are tons of financing solutions out there, but which one should you choose and how can you secure that financing option? Choosing the best source of funds for your business is not a small decision to take lightly. This is a critical choice that will affect how you structure and run your business. 

Here are the basic steps you’ll need to take to secure financing for your business. 

1. Decide on How Much Funding You Need

How much funding you need will depend on where you are in your business journey. What kind of business are you planning to open or are already operating? Are you just starting out or are you looking to grow and expand? These are the first questions you need to answer because every business and its phases have different needs. 

Start-Up Costs

This is the minimum amount of money that you need to get your business off the ground. It includes one-time charges, recurring costs, and any hidden costs. One-time charges are things like your business name registration and building signage, while recurring costs are your rent, utilities, payroll and similar expenses. The latter can help you estimate your monthly expenses. In addition, you should also set aside some amount – at least 10% – as a buffer for any contingency. 

You can also approach this as creating two lists, one for what you absolutely need and the other for things that can wait. To determine where items should be listed, determine if other areas will be affected if you put an item in the “it can wait” list. If so, it should probably be included in your start-up costs calculation.

One thing to remember when determining your start-up costs is this: If you’re taking a loan, don’t apply for more than what you need as you’ll also be required to make bigger payments. 

Cost of Expansion 

If your business is already up and running, you will have different financial requirements compared to one that is still in the start-up phase. For instance, if you’re looking to grow or expand, that could mean you have more business than you can handle, you have room to grow or need more space, or your industry is growing at a rapid pace. 

First, you’ll need to forecast the associated costs for your planned expansion. How much do you need to allot for lease? How many additional staff do you need to hire? How much inventory do you need to buy? What other costs do you expect to incur? Include those in your cost forecast.

Then, conduct a break-even analysis. You can use your existing financial statements to forecast how much you’ll need to support your expansion before you begin to reap any profits from it. Don’t forget to account for any hidden costs.

2. Know Your Options and Select the Best One

Again, you can tap into many financing options. In general, they can be divided into a few categories as you’ll see below. You should do your due diligence to determine which one is best suited for you and your business.  

Self-Funding

Self-funding means using your own financial resources, such as your savings account or 401K, to fund your business venture. In addition, it could also mean borrowing from family and friends for business capital. 

The biggest benefit of self-funding is you’ll retain 100% control over your business. But, the downside is you’ll also take on all the risk. Because of this, it is necessary that you only use the funds you can afford to lose if worse comes to worse. Furthermore, if your funds come from family or friends, you also risk straining your relationships. To avoid any misunderstandings, you can use an agreement and treat those borrowed funds as they are: Loans that must be paid.  

Investors

Investors typically provide start-up funds in exchange for some say in the business. If you go through this route, you should be prepared to give up some control and ownership in your business. 

If you’re okay with this, ensure to only work with investors or firms that are reputable and have experience with start-ups. You’ll need a solid business plan to attract them. And, before any kind of agreement can be made, they’ll look through your company’s financial statements, products and services, management team, etc. If they like what they see, you can go on to agreeing on the terms and conditions of the investment.  

Note that this type of financing usually comes in rounds. You’ll agree on milestones and as your business meets those milestones, more financing is made available. 

Crowdfunding

Crowdfunding involves raising funds from many people called crowdfunders. Unlike investors, crowdfunders don’t require ownership or control over your business nor do they expect any returns on the money they gave to your business. However, you should prepare gifts or rewards in exchange for their contribution. This includes the product you’re developing and other special perks, such as including their names in the credits of your creative work or a special event or meet-up when you launch your product. 

Loans

You can take out loans from banks and credit unions, but these typically involve a lengthy process and strict requirements. For instance, you’ll need to prepare a business plan and financial projections for several years in order to secure a loan. Alternatively, you can get a loan backed or guaranteed by the Small Business Administration (SBA). 

3. Read the Terms Carefully Before Signing

Business loans may or may not require collateral, and terms vary from one source to another, so it’s important to read the fine print before locking in. Take special notice of the interest rate, annual percentage rate (APR), loan term, payment schedule, fees, and other considerations. 

For instance, is a personal guarantee or Uniform Commercial Code (UCC) lien required on a loan which does not require a collateral? A personal guarantee means your creditor can sue you if you fail to pay your loan, while a UCC lien can basically allow your creditor to obtain your personal property or business assets in case you default on your loan.

Remember that business financing should help you achieve your goals, not tie you up with unnecessary obligations. So, take your time to think about which financing option you choose.

How to secure financing for a business

In conclusion, there are many ways to secure financing for a business but always remember to read the fine print carefully, understand your options and decide on how much you will need. Good luck!