Applying for business funding is a critical business decision. It is certainly a subject of interest for a wide range of stakeholders. From the business person wishing to expanding or looking for working capital, to the prospective funder who is in the business of availing the inflow of economic resources at a profit.
Here are our top tips to help you secure your business funding
- Plan ahead for funding. In most cases applicants’ approach funders when their business is in dire need of a cashflow injection. This increases the chances of unsuccessful business funding due to poor preparation as they might not have all necessary supporting documents in place. Such documents would include, a business plan positioned for funding, execution of a good business model and a sound financial forecast. These are essential having in place, in the event a need for cashflow arises.
- Having operated for more than a year and managing overall expenses within a reasonable parameter, below 80% of sales would be ideal for improving your bottom line.
- Business performance measures. Having positive revenue growth year on year which is in excess of inflation. Gross Profit Margin, reflects the net effect between sales volume and the cost of production. Operating Profit Margin, speaks to the operating and investing decisions, what are the drivers for operating costs, is there an efficient use of assets? Net profit Margin is a reflection of financing decisions as it includes finance charges. Finance charges should not be too high as they might be eroding profit.
- Short-term funders also look at the business financial position. Solvency, what is the percentage of assets financed by long term debt. Liquidity being the company’s ability to settle current obligation through current assets.
- Some funders look at your Point-of-Sale transactions. Asking for short term Capital that is within a 6-month average of sales increases your chances of successful funding.
- Business owner credit checks. Having a positive credit score, between 650 and 700, and also paying credit on time increases your chances.
- Lastly asking the question of whether the required funding won’t overburden the balance sheet and increase default risk.
Funders on the other hand might consider the four Cs when analyzing your credit for business funding:
- Character – Looks at Credit history. Which is the business/owners track record of paying debt.
- Capacity – Measures the borrower’s ability to repay the loan. Are the earnings before interest and tax sufficient to cover additional finance costs. Can the balance sheet take on additional long-term debt.
- Capital – Funders consider the funding requested and Capital contribution that the applicant is willing to make. The borrower’s skin in the game. It also evaluates whether they be able to pay back the loan.
- Collateral – Collateral gives the funder assurance that if the borrower defaults they can repossess it and get something back.
DO YOU OWN A BUSINESS OPERATING FOR A YEAR OR LONGER?
If so, How Healthy is Your Business?
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