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A guide to understanding your business funding needs

The plan to grow a business is generally on the cards from the outset, but the decision as to when this will happen can be an unconscious one. Most start-ups get going with a desire to survive the first year, and if demand allows, the business experiences growth and a more strategic plan starts to develop.

In most cases, businesses can manage this early growth themselves, either through self-funding or by seeking small loans or equity from family and friends. But go beyond the need to tide yourself over from one month to the next, and this short-term, quick-fix funding may not be sufficient.

If your strategic plan, possibly over 3-5 years, sees you projecting a massive increase in sales, buying more stock, moving to new premises or employing more people, then the chances are you can work out your funding plan well in advance. However, in alternative situations, where you have been caught by surprise by tough times, cash blockages or financial gaps, it is much harder to plan ahead.

Regardless of the scenario you find yourself in, calling on external investment is an essential tool to give your business a capital injection and allow it to achieve its desired results. But, to ensure you are getting the right funding for you, you need to consider the challenges facing you and how finance can solve them.

In our blog, we have outlined the key questions you should ask yourself to help you to understand your funding needs and access the finance that meets them.

  1. What is your funding need?
  2. What is short-term operational finance?
  3. What is long-term funding for growth?
  4. What funding type best meets your needs?
  5. What criteria makes for a good funding decision? 

What is your funding need?

One of the first things you need to be clear about is your reason for seeking finance in the first place. You need to be able to present a sound understanding of why you are asking someone to invest their money; what will it be used for and how will you pay it back? Most funders (debt or equity) will require this information from the outset to make an early judgement about their likelihood of parting with cash.

Understanding what your funding need is may mean asking what position you are in on your journey to your long-term goals and what you need to become financially stable as you grow.

There are two main types of funding need:

  • Short-term day-to-day operational support
  • Long-term provision for growth & development

You must consider your current requirements to keep your business afloat, and any future requirements to make your business a success. You need to have a good strategic plan in place, including an idea of the full costs involved in all your activities, both short and long-term.

Your planning should then identify which costs you are seeking support with to pinpoint your need for finance right now. You can also factor in any projected funding needs for the future and start considering what might be the right mix of finance solutions for your business.

What is short-term operational finance?

Short-term operational finance is suitable for any business looking to plug a cashflow gap with a quick injection of money or who is in urgent need of cash to stabilise themselves.

Your funding need may not go beyond a quick bailout to get you from one month to the next, or even from one order to the next, but you will still need to be clear about precisely what you are looking for. If you are pursuing finance to facilitate the long-term growth or expansion of your company, it is even more essential to consider the precise requirements you need to fulfil.

Consider the full amount that you would like to borrow, how long you would like the money for and how you plan to repay the debt so that you can confidently present your case to lenders. They will need to believe in you as the leader of the business, and in your ability to deliver the results you have projected – whether that be in terms of growth or turnaround of your struggling business.

The top short-term finance solutions are:

You should also have a good understanding of the working capital funds that you use on a daily basis to maintain a good cash flow, and whether or not (with or without finance) there is any scope for you to build up some reserves to cover peaks and troughs in income and expenditure throughout the year. This not only shows satisfactory due diligence, but a desire to plan and manage the finances of your business beyond the end of next week.

What is long-term funding for growth?

You can navigate your way through the day-to-day running of your business and have sufficient working capital to manage your monthly expenditure, but you’re seeking growth beyond this.

Your business aspirations are outweighing the money you have available. You need to support expansion, better equipment or more people and so you need to plan now to secure the funds you intend to use in the future. This is where long-term finance comes in.

As a minimum, a funding pitch for long-term growth and development will need to be supported by a robust business plan, complete with financial statements for the last year. You will also need a pitch deck to outline your requirements in detail including how you plan to spend the money, what the return will be, how long you need it for and how you will repay it.

A key consideration for you will be the type of finance you are looking for and whether a debt or equity solution will best meet your long-term goals.

The most common long-term funding solutions for growth are:

What funding type best meets your needs?

It can be easy to be short-sighted when it comes to financing your business because your focus tends to be on funding the needs that are the most urgent. But a look into the longer-term requirements of your strategic plan means that you can explore new or complementary finance options too, resulting in a more sustainable income strategy.

Two of the critical considerations when deciding the best finance option for your needs is whether you should opt for traditional or alternative finance and whether your preference is for a debt or equity-based solution.

Alternative finance provides a different set of funding options, often with simpler application processes and faster turnarounds from application to available funds, although normally at higher interest rates and increased arrangement fees. Within this (and traditional finance), debt funding commits you to fixed repayments over an agreed period with a set rate of interest and an equity solution avoids the financial commitment but sacrifices a share of your business in return for the investment.

Not only will you need to understand which of these options will best meet your funding criteria, but also which will provide your business with the best chance of long-term sustainability.

What criteria makes for a good funding decision?

Your funding needs will be unique to your business at any one time. There are no set rules around what constitutes the right funding mix, only your understanding of what your business needs to meet its objectives. There are, however, three indicators you can use to assess your funding position at any one time:

Stable: As your business grows, your funding priorities will change, and you need to ensure your business isn’t reliant on just one funding type over time. You need to be open to exploring a range of funding solutions and securing the income you require from more than one source. This reduces the risk of your business being affected should your lender(s) or investor cease to support you.

Suitable: Different finance solutions require different funding needs, and a good knowledge of the range of options available will mean you’re best placed to choose the best one every time. You should keep your business objectives at the forefront of your decision making and be led by what the investment needs to achieve rather than the investment type that is readily available.

Sufficient: Don’t underestimate the scope of what you are seeking funding for. Having a clear understanding of your full requirements means that you can pitch for a chunk of finance in one go, rather than not having enough and needing to go back for more. Additional finance can be sought at a later date but it’s accepted that this would generally be for a different funding need.

Get advice

Understanding why you need funding is the first step in any business finance journey. By asking appropriate questions, such as which challenges you need to address and the best solutions that will do so, you will set yourself up to achieve longevity and success.

If you’re looking to grow your business or fill a funding gap, but need some advice on articulating your funding needs before approaching lenders and investors, speak to one of our advisors. We can help you understand the support available for your enterprise, as well as point you in the direction of appropriate financers.

As well as this, we can help you to create funding-winning pitches to secure the support you need.

Get in touch today.

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