7 Dos and Don’ts of Financing Your Small Business

Financing is often cited as the most challenging part of starting or growing a small business. Although there are many opportunities for loans, investment and financing available to entrepreneurs, pitching to gain that funding, at the right time with the right resources can often feel like a monumental task.

So to help you on that journey, here are seven tips for entrepreneurs looking to finance their small business.

1. DO Borrow at the Right Time

Business is all about planning and preparation. Whether you need startup funding or you’re looking to expand, take time to know your business, plan the specific time you will need the money and where it will go when you have it.

Borrow too early and you may be tempted to spend the money on things you need now vs. what you planned to spend it on. Borrow too late and you could put undue financial process on your business.

2. DO Borrow What You Need

The next most important thing to know when looking for financing is how much you need. Not a ball park figure. Not a guestimate. You will need to provide a full review of your projected costs and revenue, preferably with positive and negative projections.

Too much money can leave you with debt that you need to repay, but low-balling your costs could leave you facing a cash crunch when unexpected expenses arrive.

3. DON’T Focus on Interest Rates

Although the interest rate is important, it is just one component of a loan. Instead, think about this:

  • Do you know what the period of time for repayments will be?
  • How much will the financer be willing to lend based on your assets?
  • What are their flexibility on repayments?
  • What loan term is the lender willing to offer?
  • What percentage of the cost of your asset is your lender willing to finance?
  • What is the lender’s flexibility on repayments?
  • What guarantees are being asked from you in the case of default?

As you can see, the interest rate on your business loan is important, but it’s far from the whole story.

4. DON’T Pay it Back Too Fast

Yes, loans are debt. But, there are good debts and bad debts. And repaying a loan too quickly can harm your business, leaving you short of available funds to grow your business.

Look at your statements and compare how much you would save in interest if you were to repay it earlier, with your projected return on investment of the loan – taking into consideration if there are any other ways you could invest that projected income.

5. DO Keep Track of Your Numbers

As a busy entrepreneur, bookkeeping can take the back seat to the rest of your operations if you let it. Paid invoices get stuffed in a drawer. Purchases get made on both your personal and your business credit card, etc. These are bad business habits that you need to stop.

Not keeping track of your financial records can leave you in the dark about how your business is actually performing. It also makes it difficult for a lender to assess your viability without documentation and trust your responsibility for repayments.

Being diligent about keeping your financial records up to day, and even hiring an accountant, will not only benefit your business when looking for financing, it will help you keep track of your money and make sure you are spending it wisely.

6. DO Know Your Elevator Pitch

Speaking to a lender is like going for a job interview. You need to know your track record. What makes your business viable for this bank. What your five-year plan is. You need to know your business plan inside and out and be prepared to answer specific questions on your cash flow forecasts.

Take time before you bank appointment to prepare your pitch and practice it repeatedly. Your job is to convince a banker that you not only have both business and management smarts. That you’re a sure bet to invest in.

7. DON’T Just Focus on One Financial Institution

Yes, you may have your personal banking with one company, but that does not mean you have to conduct all your business through that institution. Banks are like any other retailers. They each have their own offering of similar products, described in different ways. They are all vying for your business. So, shop around and find the best deal.

Diversifying your banking relationships also benefit your business should your business hit a bump in the road. After all, you don’t want one lender to be holding all the keys to the kingdom should something go wrong.

Finding Help

Finding financing can feel overwhelming, but it doesn’t need to be. Small Business BC offers a number of services that can help.

For help understand your financial statements, ahead of looking for financing, attend My First Year in Business – A Financial Overview or Business Viability – Analysis and Forecasting seminars.

For help writing a bank ready business plan, book a one-on-one appointment with our experienced Business Plan Advisors.

And for help in understanding some of the financing options available to you, attend our Early Stage Financing and Resources for Entrepreneurs seminar.