If you are struggling to get funding, it usually because of a couple of key factors. We’ve discussed some of this before in posts, but here we cover 4 basic steps to increase your chances when seeking funding. You may be surprised by what you learn.
Unsure of how to take your business from good to great? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.
1. Cash on Hand is Critical
We’ve said before, and we will say it again: cash is like air. Businesses, like people, can only hold their breath for so long. Dipping into your cash on hand reserves to fuel growth is a risky proposition. Any hiccup in operations can leave you gasping for air. 82% of businesses fail due to cash flow problems. If you’re struggling to fund your business, look here first and foremost. For example, check out this infographic from Business Insider.
2. Please, Please, PLEASE, Get Your Credit in Order
Very few small business owners realize that not only your credit but the credit of anyone who owns more than 20% of the company impacts your chances of getting a loan. Many find out after it’s too late to make an impact in time.
Lenders care. A credit review is standard. While I can’t prove that it is universal, I’ve never come across any who haven’t. If you have any skeletons hiding in your credit report, it’s better to fix those first. They can sink your application faster than a torpedo.
There are plenty of resources that can help you with your personal finances and credit. Unless you have stellar credit, a FICO score > 750. We suggest you read up on those before you consider applying.
3. Make Sure you Know Which Test You’re Taking
If you were studying for Algebra, but the test was on Chemistry, how well do you think you will do? The same is true here. Don’t struggle to find funding because you don’t know what you’re looking for Different lending types have different tests. The first fundamental step is to know whose test you’ll be taking.
There are two litmus tests that we advise our clients to take before pursuing this route to get capital.
Do you or any other owner of greater than 20% share of the business have a credit rating lower than 700?
Have you been in business for less than 24 months?
If you answered yes to either of these questions, this route likely isn’t worth the risk. Your chances of success are low, while a negative impact is probably. Why? Any application will cause a hard inquiry to hit your personal credit report. If you already have a credit rating lower than 700, this hard inquiry will likely negatively impact your score. We also have found people face some bank fears, so this might not be the way for them to go either.
According to Fundera’s recent State of Small Business Lending Report, “Revenue Is More Important Than Profit For Alternative Lenders”
According to Jared Hecht, the CEO of Fundera, one of the larger alternative lenders:
The primary thing these lenders care about isn’t profitability, but revenue. (Revenue is your total income generated by your business, while profitability is what’s left over from your income after you pay all your expenses and debts.) All of the businesses in the top-10 of the “most likely to receive funding” list had above-average revenue; they did not all have above-average profit.
His suggestion when struggling to get funding was to look for responsible ways to increase revenue. To do this, you have four tools in your toolkit: price, volume (# of customers or items), add-ons (increasing the average amount a customer spends), and faster repeat (more come back, more often). Whichever of these you choose is dependent on the state of your business. But it’s been our experience the add-ons and faster repeat are generally easier and less damaging in the long term. Discounts are effective. Volume depends on promotion, which can have questionable results unless you have a solid grasp on your marketing effectiveness. Know what you’re looking for when expanding your business.
4. Showing Profit Is Key for Long-term Loans
If you are not profitable, today, it is highly unlikely that you will qualify for a long-term loan. Some have. The majority don’t. Remember that same risk applies here as in the short-term loan. Each application is a hard inquiry. This is important to know when you are placing your bets.
This is true for both traditional and non-traditional lenders. Any lender that provides long-term loans will want to see a sustainable profit stream. They want to see that you will be able to sustain your loan repayment for the term of the loan.
If your strategy has been to reinvest your profits to fund growth or to lower your taxes, you should rethink that approach before applying for a long-term loan. Yes, you will take a hit in taxes, but you will also be able to show an immediate and sustainable increase in profit. You will need to decide which is more important.
5. Working Capital vs. Expansion
To say, only seek funding for major projects, is a bit unrealistic. Let’s face it. The most common reason businesses seek funding is to cover working capital. Working capital is cash that’s needed for operational expenses.
While there are drawbacks to this type of funding (lower amounts, higher rates, faster payback periods), they cannot be ignored. 82% of businesses fail due to cash flow issues, not expansion problems.
While I agree with the advice that you shouldn’t seek a loan for working capital needs unless it is truly necessary, I do think seeking a line of credit is a wise decision. Some businesses just can’t tweak the business model to make gaps between accounts payable (needing cash to pay bills) and accounts receivable (receiving cash from their customers) go away, especially in the services sector.
I fully agree that if you want to make the best use of debt financing, you should focus on using them for expansion if possible. Your chances of success are much better.
How to Save Yourself from Struggling with Funding
The unfortunate truth is small businesses do not have access to the same level of service or products that larger businesses or even venture-backed businesses do. Therefore, we need to use all the tools available to us to ensure that we are successful in obtaining approval. The good news is the small business approval rates are at all-time highs, so if you are thinking about seeking funding, this is a good time.
At ProStrategix, we know you have concerns. We’re designed to help give you the business support you need so you can focus on doing what you love. If you would like to learn about how we might be able to help you, please contact us.