Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
6 Tips For Choosing The Right Finance Option For A Business
Dec 13, 2022
Image: Pexels/Pixabay
Finances are the greatest adventure for every entrepreneur and business owner out there, and for good reason. It brings so many challenges and doubts, such as whether to pursue investors or not, take out loans, risk more, or bootstrap your dreams, but it just does not end there. Profitable times will make small business owners wonder if they need more funding; growing your business demands new places and equipment, and big sales can create cash shortages while you are waiting for the invoice payments.
On the other hand, there are also periods of shortages when sales are down, seasonality has affected your business, or maybe you need to do equipment updates. If you have noticed that your business needs financing, then you need to take it one step at a time and see if you really need funding based on your current situation, decide what the best type of funding is for you, and secure your growth. With this in mind, we have prepared a couple of tips that can help you choose the best financial option.
Why Do You Need Financing?
The first question that you need to ask yourself before choosing any financing option is, “What do we need financing for?” There are countless reasons for financing. It could be anything from expanding your capacity to fulfill orders to hiring more people and improving your marketing strategy. Also, there can be some more modest reasons, such as redesigning your website or replacing some items in your inventory. Some more dramatic financing options can cover the temporary cash-flow gap or even clean out the debt that has been burdening your books for quite some time. You need to be realistic and observe the situation. If you need financing to constantly cover the payroll or to even pay the overhead costs, then you do not need financing to take you out of the crisis; you need to reconsider your entire business plan and spot the weak points.
How Is the Business Going?
One of the best determinants of whether or not you need financing is the state of your business. If you are applying for a loan or investment, the majority of lenders or investors will look at your time in business. Not to mention bridging loan brokers, who can help you connect with the best lenders and guide you through the bridging loan application process so that you have a better chance of winning. According to reports, the longer you have been in business, the better your chances of receiving a loan or investment. Unfortunately, startups have a much harder time finding larger financial injections. The revenue is the second thing they observe. Most lenders will have minimal revenue requirements, but it is safe to show that your business can profit and generate revenues. Last but not least are the financial documents. You will need to share your tax returns, business plan, and bank statement.
Observe Your Credit History
The better your credit score, the better the terms of the loan you will receive from the lender. Truth be told, some lenders have minimal personal credit scores, most typically above 600, but an elite score can say a lot and tell lenders that you are indeed a good bet to pay your loan back. This means you can be charged a lower interest rate and that they can give you longer repayment terms.
What You Can Actually Afford
When seeking financing, you need to have a plan or strategy on how you will complete the project and reach the goal that can benefit you. “As much as possible” is not a monetary amount you need and is a catch that has ruined a lot of business owners. You need to be realistic and observe your current state to see how much you can afford to be funded. Taking into consideration your cash flow and all of the requirements will help you determine how great your loan should be.
Image: Pexels/Pixabay
Debt Vs Equity?
The most popular form of financing for small businesses is debt financing, which is a loan. You can also consider equity financing, which is when you sell a portion of your company's stock to someone in exchange for investment. Financially, there are many differences between debt and equity. One of the most important is that the first round of equity funding will not be appropriate for some smaller financial needs.
The Best Types of Financing Options
Before we set all of this aside and get to choose the best financing option, you need to be aware that there are many different options in the first place. Term loans are some of them, and they include those from banks, online lenders, or non-profit lenders, which can provide you with a lump sum of money that you can pay back in installments. Some other financial options include SBA loans, lines of credit, microloans, and others.
See: Debt vs. Equity Financing: Pros And Cons For Entrepreneurs
Business financing is a huge step, and it should be taken seriously and with caution. Before you even make a final decision and receive additional funding, you need to reconsider everything about your business, starting with whether you really need financing in the first place.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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