One certainty in the world of business is that you cannot stay open for long if you do not have access to capital. This can come from customers (e.g. sales), investors, or through credit. In the end, you need to have one or all of these the options working correctly to grow your business.
In this article, I want to review some of the secrets you need to know for picking the right funding partner for your business to avoid unnecessary business debt. These tips are taken from business leaders throughout the country, and by following them you can make better decisions on how you finance your business in the future.
Focus Your Search
First of all, choosing the right funding partner is not something you can do at the drop of a hat. It takes time to understand how a particular funder’s offerings best fit your needs. One thing you should remember in your search is the golden rule of financing. Short-term loans for short-term needs; long-term loans or equity for longer-term needs. This will not only give you clarity on what solution you should be looking for, but will also help you to focus your search.
Know What You’re Talking About
It may come as a surprise, but there are tons of otherwise capable entrepreneurs that do not do their research before meeting with potential fund partners. After all, we do not all have the opportunity to go to the top business schools in the nation. You want to know not only what your business needs are, but also the metrics involved. Most business finance providers determine eligibility using these same basic metrics, so you want to make sure you know them. Revenue, average order value, conversion rate percentage, site traffic, and customer lifetime value are some must-know metrics. Customer acquisition cost, margin produced by the customer, and cost of customer marketing are also three additional business metrics you need to become familiar with. Make sure you learn not only what business metrics are, but also how to calculate metrics for your own business. This will make it much easier to find a funding partner to get the private business loans you need.
Create A Shortlist
Once you have determined which programs are the best fit for your needs, then the next step is to build a shortlist of finance partners in a particular space. At this point, you want to look at the differences between their programs and how it will fit into your ability to repay the original amount.
Just because an equity investor is not giving you a loan does not mean you do not have to pay them back. In fact, many equity investors expect their equity to be cashed out in the form of a balloon payment at some point in the future. Remember, the devil is in the details. So while an equity investment might seem like a good idea at the time, you have to be prepared for the time when the investor will expect their money back.
If you have decided that some sort of debt finance is the right fit for your needs, then the key is to determine what you will use the money for and how long you will need to repay the loan or line. Keep in mind the golden rule, as not all debt finance is created equal.
The beauty of debt financing is that it is usually easier to secure when compared to equity finance. In addition, there are a number of options to choose from. These include invoice discounting, factoring and reverse factoring, credit lines, working capital loans, inventory loans, etc.
When looking at these programs you want to understand the terms. How will the loan or line be funded, and importantly, how will it be repaid? For example, invoice discounting is often used to draw money against future invoices to pay for purchases today.
This can be a really useful option if your company is growing fast and needs short-term capital to buy raw materials for sale in the not-so-distant future. However, invoice factoring financing is not a good option if your business has a long order cycle or if you are going through tough times.
Another point of note is that if you are effectively trading on the creditworthiness of your customers, this form of finance might not be a good fit in all situations. That being said, if you have strong customers, then invoice financing is a relatively easy way to release cash quickly.
Get To Know Your Funding Partner
No matter what program you choose, you want to make sure your funding partner is someone you can work with. It’s not just their money that you want. You want a lender who is easy to work with and has a good reputation in the communities they serve. The worst thing that can happen is to get funded and then run into nightmares when trying to process payment – especially when you are using invoice discounting or some other factoring solution.
As such, you should reach out to the lender to find out more about who they have worked with in the past and how that situation was similar to yours. If possible, try to contact real clients from lenders to get real feedback about their experiences. This will prove extremely valuable and you may even make a new connection through the process.
Remember the golden rule to financing! Short-term loans for short-term needs; long-term loans or equity for longer-term needs. Also, match the program with your needs by checking the terms and conditions, and remember to talk to past clients to get a feel for how it will be to work with your funding partner. If you follow these funding secrets you will get more than just money, you will get a partner who will help your business grow.
Image from https://www.credibly.com/incredibly/the-difference-between-growth-capital-and-working-capital/