In the longer term what funding you choose can not only be detrimental to specific projects but the entire livelihood of your business. If it is a one off project you will have totally different needs to a business with an ongoing working capital issue – they need a long term finance partner and so the solution needs to deliver that.
Broadly there are two categories of funding – debt finance, funding up front with a cost on top of repayments, and equity finance, which offers finance in exchange of the future value of the business. Usually, debt finance is the preferred choice compared with giving away equity, but some small businesses can get trapped in a cycle of debt where repayments impact cash flow.
This article outlines what you need to consider before you start seeking finance and how to navigate the SME funding landscape effectively.
Know your business
It is important that you start by trying to get a degree of perspective and realism – take a step back. Is your business ready to take on the potential pressures of additional capital? Is your house in order?
If you are not in a position to share your records and are not in touch with your finances then you need to be. Lenders will need to feel confident that you are capable of efficiently managing your finances before considering loaning you their money. It is vital that you have truly assessed the impact the extra finance will have on your business. What you can afford to repay should impact the term length you borrow over, the way the finance is structured and which provider you ultimately sign up with.
Know what you need the money forMost providers will be flexible about the use of the finance they give you as long as it is to do with your business. That does not mean, however, that they will not ask you what that is. Make sure that you have a clear plan outlined, calculate the amount you need and the timescale you will spend it in. Even if the lender does not require this level of detail, it is vital to ensure that you choose the right type of funding, means you are more likely to get approved and also to ensure that you do not over borrow.
Know how much money you needDo not borrow more than you need. There is no need to use a hammer to crack a nut If it is a loan for growth, borrow in stages, when you need to – there is no need to just take the highest amount you are offered. If you are giving away equity or doing a VC funding round it is even more important to calculate and plan. You are effectively sharing control of your business. Give away as little as possible whilst still being able to achieve your plans.
Firstly – why get into debt unnecessarily? Secondly – what kind of lender is just blindly offering you that loan? What does it say about them? –Why do they not care about your business? The sales process should always be a two-way street. You are selecting who you trust and would like to work with as much as they are assessing whether they can support you.
Education is one of the biggest issues for SMEs and finance providers. Take the time to educate yourself on the options that are out there for your business. Be savvy, you do not need to wait months to hear back from your bank before you pursue alternatives.
Shop around and educate yourself
Shop around. Is there a provider who specialises in your sector? Perhaps one who can deliver the funding in a short time frame? Whatever it is that you need, if you take the time to look you will almost certainly find it. The current SME finance landscape is saturated with products which are just not well known about. If you empower yourself with knowledge, you can also negotiate for the best deal based on your research and that way if the bank does say ‘no’ you have already got other offers on the table.
Take adviceIdeally, consult with someone you trust before you begin the process but absolutely talk to an independent advisor once you have offers on the table. Ask your accountant, your broker or even your dad if they are good at this stuff. Weigh up the options – is debt finance better? Are you prepared to give up equity? What is your position on personal security? Can you afford the repayments?
A second opinion is vital and they can help to ensure that you have truly explored all the options. Navigating the maze of SME finance has become increasingly challenging.
Be proactive, not reactive.
Smart businesses seek finance strategically before they need it. If you find finance before you need it then it is much easier to keep to good practice. Leave it too late and the chance of ending up with the wrong match increases, because you will lose the control. If you are desperate, your choices narrow, you may have to surrender more security and pay higher rates. A rash decision can mean that long term your finance choice may not work for your business at all.
At Nucleus, we feel strongly that finance must be right for your business. We take a consultative approach to our lending and pride ourselves on our specialist knowledge. If you need finance to grow, manage cash flow or for any other business reason, we have a product to suit you. Chat to our team today to find out more or download our fact sheet.