Small businesses, beware! Without a positive cash flow, your company could sink before it’s even set sailing. Nearly half of all new businesses cease trading in the first three years of operation so the early stages are the most critical.
It’s at this time that having some extra finance to hand will help to keep you going and jump the hurdle from a start-up to a still-going-strong company. Here are the key things to remember.
Weigh Up Your Finance Options
Too many small businesses think their finance options begin and end with their local bank manager. However, due to the strict lending requirements now in place for large financial institutions, banks can be one of the hardest places to access finance from when you need it. However, there are many other short-term finance options out there, including merchant cash advances, logbook loans, factoring, lease financing, credit cards and more.
Interest rates on these types of short-term loans will naturally be higher so make sure you can make the repayments without it adversely impacting your business performance. Alternatively, you could go a less formal route by asking family or friends to invest in your start-up. However, you risk harming your most important relationships if things don’t work out as planned. Another option is to seek angel investors or other third parties who will inject cash into your venture in return for a slice of equity.
Many small business owners make the mistake of asking for what they think will be approved – rather than what they actually need – when they request finance from a bank or other investor. However, any investor will want to see that you’ve done your financials carefully and have a strong business plan for growth to back up your application. Bank loan procedures, in particular, can be rigorous and involve a lot of paperwork so don’t come ill-prepared but ensure you know exactly what you need. If you’re not asking for enough to realistically grow your business in the longer term, you’re more likely to be rejected as a result.
Use Your Finance Wisely
Once you’ve secured your additional finance, you have to use it in the right ways to yield the best ROI. Of course, you may need it to plug a cash shortfall and help you pay next month’s bills. However, if you’re generating less revenue through your loan – whether in the short-term or as a longer-term projection – than it’s costing you to repay, you’re not using that finance to gain the optimum leverage. Smart ways to use your finance might include investing more in machinery and equipment to help bring production costs down, or increasing your inventory in order to handle larger orders. Another option is to invest in new employees that can add value to your enterprise. Think carefully about how to build the best team – from technicians to salespeople, financial wizards and those with strong marketing skills – to grow your business in the future.
Plan Long Term
Your ability to plan long term will depend in part on your investors and shareholders. Some will want to see profits quickly, pushing you to seek short-term gains rather than a long-term strategy for success. However, most smart investors will know that the end game is long term profitability and pushing for high dividends too soon could harm the financial stability of the company. If you’ve got external investors, chances are you’ve created an exit plan for selling the company so they’re assured of a healthy return on their investment. However, if you’ve been able to finance growth without external investors, you may not have been forced to create an exit plan. In this case, you can focus on the long term goal of growing the business steadily and sustainably.
Most start-ups and fledgling businesses need a helping hand in the form of extra finance. However you choose to finance your new enterprise, be sure to invest the money wisely to guarantee long-term growth.