Getting investment is one of the most common ways to grow your business. However, it’s not the only way. If you’re not keen on parting with equity or reporting to investors, there are lots of other ways to fund the next phase of your business journey.
Recently, there’s been an increase in funding options for small businesses. Government schemes such as SEIS/EIS, as well as other options have widened the playing field. While this fresh focus on support for SMEs is encouraging (and long overdue), understanding which option works best for you is crucial.
Matching your business needs to the right scheme enables you to pinpoint which goals the funds are driving – as well as how to maximise the cashflow boost.
Business funding can take many different forms, including:
Most funding options are tailored to meet a specific need. For example, a credit card is an excellent way to manage regular spending. However, you wouldn’t use this to buy a house. In that case, a mortgage offers much better rates and advantages.
The same can be said for business funding. In order to understand which option works best for you, you also need to understand exactly what the funding will be used for.
There are many reasons that businesses decide to take out funding. Interestingly enough, a cash flow crisis isn’t the most common denominator. In fact, when it comes to applying for additional funds, growth – not survival – is often the main driver.
Here are some of the most common motivators for SMEs to apply for funding:
This is less ‘keeping up with the Jones’ and more ‘edging out the competition’. Thanks to modern tech, it’s never been easier or more affordable to start a business. For many SMEs, funding is about staying one step ahead.
The modern marketplace is in a constant state of flux. Amid ever-shifting trends, maintaining brand visibility is crucial – and sometimes costly. Website overhauls, rebrands and new tech are all key areas where funding is invested.
This can mean supplier discounts, profitable partnerships or investment options. Having the capital on hand to seize the moment means reaping the benefits. Often, these kinds of ventures end up paying for themselves – and more.
Another reason many businesses take out funding is to keep the workflow strong. For example, you may have several invoices pending, but need cash in the interim to purchase stock or cover overheads till the client pays out. The ability to move forward, without being stuck in financial limbo, helps drive business growth.
Of course, there are other reasons business owners apply for funding. They may have genuine cash flow issues, or a project that’s eligible for a specific kind of grant. Some even take out small loans to improve their business credit rating, meaning they can access bigger funding later on.
TOP TIP: When borrowing large amounts of money to inject into your business, you want to be absolutely sure you’re putting it where it will make the most impact. At Addition, we can help you use your business funding for maximum growth. Why not schedule a free call?
In order to make the most of a loan, you need to know which one works best for you. For example, if your customers are allowed to pay within 90 days of receipt, but your suppliers want upfront money, a working capital loan is your best bet.
You might have a strong business model with excellent revenue, and decide that next year you want to expand.
For example: maybe you’ve got two restaurant sites performing very well, and you want to open a third one. Although you know that this third site will be a success (based on location, target clients etc.), you haven’t got enough cash to go ahead with it. Business funding would be an excellent way to get the ball rolling for your company’s growth.
Cash flow is the movement of money in and out of a business over a period of time. As per the name, forecasting means using current numbers to predict future outcomes.
Once you’ve decided where your funding is going to go, you should create two forecasts. The first should look at how much money it will cost to complete your growth goal. The second forecast should examine how much it will cost you to keep your business running in the meantime.
Let’s look at the restaurant example again. Your first forecast would determine the cost of opening the new site, while the second forecast would tell you how much cash you need to keep your two other sites operational. Lastly, you need to think about how much the new site will cost you before it starts generating profits.
Planning and ensuring you know how much cash the project will require is essential. For this reason, a cash flow report is one of the most important things you can do to get new ventures off the ground.
TOP TIP: Accurate financial forecasts rely on a lot of variables and can be tricky to predict. Many business owners hire outsourced experts (like portfolio CFOs) to make sure their numbers add up. For more information on how portfolio CFOs are helping small businesses win big, check out our article for Fresh Business Thinking.
Many first-time buyers consult a broker a good few months before applying for a mortgage. The broker not only shops for the best deals – they’ll also advise on how to manage your cash flow and plan strategically for a green light from the bank.
The same can be said of applying for business funding – except, instead of consulting a broker, you can hire a portfolio CFO to help guide you through the process successfully.
Chief Finance Officers are masters of strategy. They’ll analyse your business with surgical precision, spot any potential issues and give you tools to close the gaps. Portfolio CFOs can do this for a fraction of the cost of hiring a full-time finance team, which makes them an ideal solution if you want to scale on a budget.
So how can portfolio CFOs help you successfully apply for business funding? Let’s look at an example of a two-step process from our portfolio CFO team at Addition.
Responsible lenders want to know that you can afford to repay a loan. One of the ways they’ll do this is by checking your company’s financial health.
Addition CEO and founder Graham Davies says that two years of profit history is ideal. “We look at your numbers to answer the fundamental questions: do you make money? Is your business profitable – and is it profitable enough to support this loan application?”
Obviously, if your business hasn’t been around for two or more years, there are still ways to determine profitability. However, being able to show two years of good, consistent profits is a green tick on your loan eligibility.
A strong profit margin is one thing. But are your profits proportional to the amount you want to borrow? Whether it’s a mortgage or a credit card limit, banks base how much they’ll lend you on your income. The same principle applies to business loans.
“The second thing we do is check your balance sheet and positive net assets.” Says Graham, “That’s what lenders would look at – can your business afford to pay back the loan? Ideally, you wouldn’t want a loan amount that’s more than 25% of your profits. Say your loan repayments would come to £50k a year, but you only make £30k a year. You’re not making enough profits to pay the loan, therefore you can’t afford it.”
Debt is another issue on the balance sheet. “If you already have other loans, or owe money to suppliers, the lenders may decide not to grant the loan.”
“What Addition would do is set up a call and look at the numbers for you.” Graham explains, “And even if the timing isn’t right for you just yet, we’d be able to give informed advice – usually three things to do – so that in a year’s time, you can get that loan.”
TOP TIP: If holding off for a year isn’t an option, Addition has a list of preferred lenders to introduce you to. These are trusted companies who may be willing to loan you money even if you have negative net assets or are high risk. Ultimately, whatever lender you choose, Addition will support you with the application and do everything we can to get you approved.
Business finance is a great alternative to investment if you’re not keen on parting with equity. But getting your finances under control and up to date is essential to make you appealing to lenders.
Addition can help you showcase a strong profit history and good net assets. We can also guide you through determining how much money you need to borrow, and for what. Get in touch with our CFOs today!