Archives February 2022

When a business is doing great, it still requires investment: new equipment or more space is needed to grow and develop, increased sales can create a cash flow deficit while you are waiting for bills to be paid, etc.

Difficult times can also bring back the issue of raising finance: sales have fallen, seasonality has affected the business, or perhaps the equipment needs to be replaced.

When is funding needed?

“Funding” is not the same as “cash”, so it is important to first determine if the business really needs funding. There are a few situations that do require funding. Let’s consider them.

Lack of funds

For example, you have to pay employees every two weeks, but customers have 30 days to pay bills – this creates an imbalance in cash flow. If your business is growing and prospering, funding may be available to cover this short term cash flow shortfall. However, if your business is struggling, don’t seek funding as a preventive measure. 

Large purchases that contribute to a new stage of development and growth

Sometimes you have to spend money to earn it. But as with a cash crunch, take this step to accelerate growth, not make up for failures. As the business grows, you may need new equipment, larger facilities, etc. Or you may have the opportunity to acquire another business. Your financial records will help determine if the business is in a situation that requires (and allows) funding.

Emergencies

Equipment gets old and breaks down, employees make mistakes, and at some point you will be faced with the fact of a major purchase that you did not count on (at least in the near future). If this is critical to your business, sometimes outside funding is the only option.

Determine the nature of the deficit 

Once you understand that funding is needed, the next step is to determine the nature of the deficit. Is the need short term or long term? Short-term cash shortages may be the result of recurring seasonal fluctuations. If you need to make a large investment in October to purchase inventory that you will sell in November and December, you have a short-term need. If you need to buy equipment to increase production by 10% over the next five years, this is a long-term need.

Match needs with the right type of funding

Try to cover short-term needs with a short-term loan and long-term reserve debt for investments that will add value to your business over time.

When comparing financing options, consider repayment terms, any required guarantees, loan terms and relative interest rates. Learn about financial reporting requirements , the need for an audit , and any special additional information you must disclose to a lender. Be sure to ask about any other fees that may apply.

Collection of documents for the lender

Different banks and lenders will ask for different documents, but most of them will want to see this combination:

• tax returns
• Bank statements
• cash flow statement
• report about incomes and material losses
• sales forecasts
• legal business documents

If your business is healthy and you just need a little boost to get it moving forward, start exploring financing options that are right for you.