Financing a business can often be perilous if not approached with caution.
Although bad management is commonly given as the reason businesses fail, inadequate or ill-timed financing comes a very close second. Whether you’re starting a business or expanding one, sufficient ready capital is essential.
But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that you will avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.
Before inquiring about financing a business, ask yourself the following:
Are you sure that you need more capital?
Can you better manage existing cash flow?
How do you define your need?
Do you need funding to expand?
Do you need funding as a cushion against risk?
How urgent is your need?
How great are your risks?
In what state of development is the business?
For what purposes will the capital be used?
What is the state of your industry?
Is your business seasonal?
How strong is your management team?
How does your need for financing fit in with your business plan?
If you don’t have a business plan, make writing one your first priority. All capital sources will want to see your business plan for the start-up and growth of your business.
There are two types of financing: equity and debt financing. When looking for money, you must consider your company’s debt-to-equity ratio – the relation between pounds you’ve borrowed and pounds you’ve invested in your business. The more money owners have invested in their business, the easier it is to attract financing.
If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won’t be over-leveraged to the point of jeopardizing your company’s survival.