Whether you are just having a business idea or are running a startup, it is crucial to know if you are eligible for a small business loan or if it’s time to find additional funding to keep growing your business. Without adequate financial resources, your business will have a hard time finding its footing. Entrepreneurs also need to be realistic about how long it will take for revenues to catch up to costs. Understanding your financial needs is the first step toward narrowing down your financing options — or whether you need financing at all. Keep a lookout on these few tips to know when you require funding:
- At idea stage: When your business is at an idea stage you need to ask yourself whether your business offering has a value attached to it that will benefit your customers, and is your idea technically feasible. If the answer comes to be in the affirmative, then you need funding from outside if you cannot self-fund it.
- Before you seek small business financing, draw up a detailed business plan for your idea that covers two-plus years of projected expenses. That’ll help you make sure you can afford any business loans you’re thinking about.
- Calculate your financial resources: Estimate how much starting capital you will have and the amount of revenue you’ll be able to generate each month during the startup period. To calculate the latter, research your potential market and industry averages to come up with realistic numbers.Now, plug your estimated financial resources and your estimated expenses into a set of financial projections for your business. A quick examination of your projections will show if you’ll have a financial shortfall.
- Know your costs: Once you’ve determined your initial (one time) and follow-on expenses, you will need to estimate how much money you will have at your disposal.
- Manage your cash flow: Negative cash flow can impact your business tremendously, and this should be a cause for concern. Cash flow is an indicator used by many to determine the viability of a business. You can use business funding to assist you in properly managing your cash flow, especially during your growth periods.
- Growth / Expansion: If your operation is growing so quickly that profits can’t keep up with demand, then it’s time to seek additional financing to make sure you can scale to meet needs. You’ll need more funding when your operational costs exceed your existing capital amounts. But your future gross margins should be increasing, too, because your lenders will want to see evidence of profitability.
- Cushioning for risk: As part of your planning strategies, you should think about cushioning for risk.