Starting your own business can be very exciting, rewarding and challenging. You’re developing a product or service that you really care about for a market that you know well. As a small business owner, you’re concerned with your product or service, marketing, sales, operations and finance. The first year can be very difficult. Once you have some revenue, it gets easier. It’s also easier to secure funding when you know what to expect and are prepared. Here are a couple of things to consider before approaching a lender for a small business loan, line of credit or government contract financing.
1. How to Determine Your Financial Needs
Having a strong understanding of the economics of your business is very important when thinking about financing. Knowing the story behind your business, your goals and what you need to get there can be very compelling to lenders. The most important advice any financial institution will give you is to plan ahead and expect a few emergencies. It’s always advisable to secure funding before times like these.
Cash flow or coverage is the most important metric to understand about your business when seeking funding. Lenders call this Debt-Service Coverage Ratio (DSCR). This is a measure of the cash flow available to pay your current debt obligations.
2. Reasons why you may (or may not) need funding
What's the nature of your need? Thinking about what the nature of your need is before seeking funding can help both you and your lender. Understanding how you will use the money you receive can really help you get the most out of your funding. You’ll also be able to tell your lender what your plan is for using the money and how it will not only help you grow your business but also ensure repayment of your loan.
How urgent is your need? Sometimes the urgency of your funding needs can dictate what type of lender to work with. If you need a fast but small loan, a traditional bank is probably not the best option as they can take months. Other alternative methods of lending are available and have faster turnaround times but typically higher rates.
Is your business seasonal or cyclical? Seasonal business are typically short term and can consist of smaller loans. Knowing that your business is cyclical can be helpful when securing loans. This goes back to cash flow. Understanding when cash is entering and exiting your business bank account lets lenders know that you are more likely to pay back your small business loan.
What Types of Business Financing are Available?
After considering your financial needs and reasons why you may need funding, it’s time to look at what types of financing are available. Three main types are self-financing, debt or equity financing. We take a deeper dive into financing for small business in this ebook, “The Basics of Small Business Financing.” Learn more specifics about how to get a small business loan, how to open a business line of credit or get government contract financing.