Most businesses need additional funding at some point within their lifecycle. Whether it's a bank loan, angel investors, grants, family and friends, Venture Capitalists, or other sources, it's crucial for a business always to have a positive cash flow. But how do you know when it's the right time to seek funding for your business?
After working with hundreds of startups, there are clear signs that we've discovered to help you understand when your business needs financing. Check out these 7 signs your business needs funding, so you're ready to seek a credible funding source with action steps.
1. You have untapped sales.
Do you ever get instances where your available inventory doesn't meet the demand? Does it take long for your sales department to complete orders? Do you often end up with unfulfilled orders? If this describes your business, you probably need to seek funding to finance the shortfalls.
If you lose a customer who is seeking your products or services due to stock shortfalls or inability to complete a service, the chances are they won't return. A hassle-free fulfillment process enhances customer satisfaction, boosts the rate of return buyers, and attracts more clients through word-of-mouth, essentially growing your revenue.
Invest the additional capital in creating more capital and proper systems to facilitate order fulfillment. Funding is crucial because acquiring a new client is more expensive than maintaining one in this state.
2. You need to fulfill a contract.
Your business might sometimes receive a unique contract not in line with your day-to-day operations. Let's say you just opened a t-shirt company with a maximum daily capacity of printing 50 shirts daily. Company X orders 2,000 printed shirts for their employees. They request a two-week turnaround.
What do you do? Even if you run at full capacity, you will only be able to deliver 1,000 t-shirts after two weeks, and you might also have to delay the delivery of other orders. Instead of missing out on the opportunity, seek funding immediately. The money sought can be used to sub-contract another business to fulfill part of the order or increase the business's capacity by hiring part-time employees and leasing more printing equipment.
Then get a properly defined contract with details of the order from the client. Once you have the documentation, you can approach a bank and seek a special form referred to as contract financing. In this financing form, the bank will give you a cash advance on the work you are yet to do.
3. Your business is paying a high-interest debt.
Perhaps when you were starting, an expensive loan was the only available means of financing. Most investors and financial institutions consider businesses at the early stage high-risk. As a result, you might have to settle for high-interest debt as the only solution to finance startup expenses. Carrying the expense will strain your business financials in the long run. So, what do you do?
Establish your business credit, and re-finance the debt to acquire a lower interest rate. You could also borrow another loan or seek cheaper financing from a different source to repay the costly debt. Doing this will improve your business's overall financial health, making it even more attractive to other equity investors and debt financiers.
4. You need to invest in technology and better systems.
Have an internal audit with your team to determine whether they have up-to-date tools to work efficiently. If you need to upgrade the technology and systems within the company, but you don't have the financing for it, you can seek external financing. Investing in new equipment can offset multiple costs and give your business a competitive advantage.
However, it is essential only to do this once you have a well-defined and fully-functional business model. Avoid taking on loans and other investments when you are not confident whether the returns will be sufficient to cover the additional costs that come with the financing options. Also, consider leasing versus purchasing options and find the structure that best suits your business financially and strategically.
5. There is an acquisition opportunity.
If a product line or a company with offerings complement yours is up for sale, but your company can't afford the acquisition, seek external financing. Acquisitions and mergers are crucial for growing businesses to attain a strategic market position.
They can also increase economies of scale, give a competitive edge, access to new markets, resources, and better talent. It's crucial to hire a knowledgeable consultant or sub-contract a consulting company to offer their expertise on the legalities and processes. It's also essential to complete a proper analysis to evaluate a more accurate return on investment (ROI) before an acquisition.
6. You have a delay in account payables.
Are you late on fulfilling your accounts payables? This situation can easily damage relationships you have built with vendors, suppliers, and other core partners. This could also quickly escalate into a legal issue.
You could be experiencing a slow season or have to close down the business for a few days, but you can't ignore what is due. External financing can alleviate the pressure and give you time to recover your accounting books and revert to normal operations.
7. You have a labor shortage.
When your current team doesn't have the necessary skills to perform specific tasks, or the number of tasks exceeds the completion time, you, my friend, have a labor shortage.
The only way to address this is by hiring more people. But, the hiring process can be expensive, and you might not have budgeted for this within your annual financial plan. In this case, seek external funding to cover your hiring needs. However, there are two main things to consider before hiring someone new. One is to determine the ROI of each additional employee. The annual wages and benefits should surpass the returns the employee will bring to the company. Secondly, evaluate your current employees and determine whether you really have an employee shortage or whether your employees are under-producing.
Businesses without financing sources flounder. It is vital to have capital injection into the business at the right time. We hope this short guide helps you determine when to seek financing. Make sure to bookmark this for future reference.