The numbers are in, and 82% of small businesses that crumble cite cash flow problems as the reason for their downfall. That is without counting the number of established companies that also fail or have to restructure due to financial mismanagement.
To avoid going down the tubes, many businesses will routinely leverage outside financing for various use cases. If you’re not sure your company needs to borrow funds, here are five reasons why firms choose to seek business capital to help you think through it.
1. To Fuel Your Growth
When your business finally comes out of its formative stages and hits a growth phase, you inevitably find the need to fan the flames. As such, you will need to raise more resources than what the business can generate internally to take you to the next level operationally.
The type of funding you look for will depend entirely on your growth phase.
For example, you can approach a traditional lender if you need to add more warehouse space and can come up with the necessary collateral.
On the other hand, an alternative lender can help finance your digital marketing campaign to drive up your sales in return for a cut based on the new revenue coming in.
2. To Buffer Against Risk
Not everything goes according to plan even after you set up a well thought out strategy. As a necessity, you will, at times, need to raise funding to act as a buffer against adverse circumstances that can threaten your business.
The capital you raise can enable you to have cash at hand if you need to capitalize on flash purchases.
You can also use the funds you raise as a cushion in a harsh economic environment to avoid a more severe impact on your operations.
For example, if your industry experiences glut, then a business line of credit can be useful in staying afloat when you have more inventory than you can sell.
3. To Start the Business
Raising capital to start a business can be feasible, depending on the approach you plan to take.
For resource-intensive endeavors needing significant research and development investment before gaining traction, for example, looking for enough capital to navigate the grueling phase becomes pivotal.
But not all is the kind of funding you need. The class of funding you need to start the business is what determines the type of investor to approach.
Therefore, learn which investors would make the right fit for your idea before sending out pitches.
4. To Manage Your Cash Flow
Your business will, in large part, live or die by the health of your cash flow. If you’re planning is not prudent, it can lead to cash crunches that might threaten your business no matter how profitable it is on paper.
Some businesses need to buy more inventory beforehand, which then ties up their finances. For other firms, their 30 to 60-day sales cycle means there is a lag between when they spend money and when revenue checks in.
Finding alternative funding sources can help keep the ship afloat in such situations. Ideally, any funding you source to manage your cash flow should be short term to keep the cost of financing low.
5. To Restructure Your Debt
Restructuring debt so that your company can operate more optimally can occasion the need to raise outside funding.
To this effect, a loan that brings all your debts together can help make your finances more manageable. You reduce the overall costs of financing while also cutting down on the number of parties you deal with.
Refinancing your debt also has the potential to free up some funds for you to plow back into the business. That then helps you increase your earnings so that you can repay the outstanding debts faster.
Winning Tips to Enable You to Seek Business Capital Successfully
Knowing why you need to raise capital for your business is only half the battle. Gaining insight into how to win that capital over successfully will help you be on your way to enjoying the American dream. Here are some actionable tips for landing the financing you need.
1. Have the Right Team
Having an excellent idea without a team that can take advantage of it is fruitless. As such, a financier looking at your proposal will pay critical attention to the team on hand.
Previous success among the team in the direction you want to pursue is a strong magnet for financiers. It shows them that the people they want to invest in know the business terrain and can identify the nuanced issues that can make a business flop.
If your team does not have the previous experience, then you need to ensure there is deep domain knowledge in the sector you want to target.
2. A Long Term Vision
For many investors, the sweet spot in any proposal is when there is a viable business plan in the here and now that also has a broader, long-term vision.
A financier desires to see the viability of your pitch in the short term but also has the option to buckle in for the long-term if it’s a promising market.
Therefore, as you develop your pitch to show how you plan to break even and start being profitable, you have to consider scalability. The plan you present should show how you plan to use today’s success to dominate tomorrow’s landscape.
3. Get Your Numbers Right
Few things turn off financiers than an entrepreneur looking for funding and who does not know their numbers. Drill down on why you need the amount you are looking for to ensure you can answer any queries satisfactorily.
Additionally, you need to make a financial case for how you plan to use the funds. You should connect how you plan to spend the money with the resulting benefits for your pitch to be compelling.
Find the Right Investor for Your Business
Sourcing external funding is not new to entrepreneurs, but what you should keep in mind is that not all money is right for your business. When you seek business capital for your firm, ensure you know why you need the money and how you’ll use it profitably. That way, you will be in a position to grow enough and repay it.
Do you need inspiration on how to make your firm more successful? Check out more of our content for lessons and ideas that help your business flourish.