One of the biggest issues facing startups is when to take on capital to help them scale, and the best way to source it.
There’s a big range of options. How you go about raising the working capital you need requires serious thought about whether the business wants to take on debt or dilute equity or both.
The options include crowdfunding, which can range from product presales to equity crowdfunding, to a line of credit with your bank, private equity from venture capital firms, microloans, or a traditional small business loan from a bank and now; unsecured business loans from non-bank lenders..
Asking others to back your vision requires effort and attention to detail.
You may have done a great job bootstrapping your startup so far, and polished your 90-second elevator pitch, but the due diligence investors demand before they’ll hand over the cash means you’ll need to demonstrate a thorough understanding of you business and the way forward.
The hardest part is that each option has different demands and criteria you need to satisfy, especially if you’re applying for a business loan.
You can read more about which business loan is best for you in this guide to small business loans.
Here are five things you need to do, and mistakes to avoid, when you’re seeking funds.
1. Have a business plan
Your original idea may have been written on the back of a beer coaster in a pub, but lenders prefer hard data over vision.
Business loans are different to personal loans, which generally just measure your income and expenses and check you have enough to repay the loan.
Your company will need to show its ongoing viability, which can be a challenge in the early stages of a startup, and you’re trying to grow rapidly to build your product and scale.
Your business plan will need to outline how you plan to spend the money, your goals, when you expect to turn the corner from investment to profit, you past and projected financial results and the key personnel who will help you achieve those results.
A good business plan is an exercise in both execution and discipline. And you’ll need a strong one to win over investors.
2. Explain what the money’s for
Saying “working capital” doesn’t quite cut it with lenders. Using the loan to improve your cash flow doesn’t really impress lenders.
You’ll need to demonstrate how the money will be invested to grow your startup and improve it’s viability and profitability, but it’s surprising how many founders forget to outline this as part of their application.
3. Identify what collateral you can offer
If things go pear-shaped, lenders will want a way to recoup their cash and that may mean you have to offer some sort of security to guarantee the loan.
For banks it’s often a necessity – the Hayne Royal Commission heard harrowing stories of people losing their family farm after banks called in the loan and sold the farm to recoup their cash.
Sometimes parents who already own their own home offer it as collateral to help their children in business. As founders, you’ll need to identify what you can put up as security, which means a serious conversation among the founders about what they’re prepared to risk to back the venture. Be prepared.
4. Check your credit score
One of the first things lenders will do is check your and the business’s credit scores to assess the risk from lending to you and the company.
A business credit score is a numeric rating used by banks and lenders to assess loan applications.
They’ll also check your credit report.
There’s a different between credit report and a credit score. The report has your credit history over several years, while the score is simply a number determined by the report.
If you’re a founder who financed the early stages of the business from several credit cards, and maybe was a little late on the repayments as a result, or went over you credit limits sometimes, that will influence negatively on your credit score, so best check that you’re financially fit for a loan before applying, because being knocked back then has a snowball effect on future loans.
5. Don’t make any last minute financial changes
Nobody likes surprises, especially lenders who want to see your business is on a steady path before they’ll lend to you, so be careful to not make any financial restructuring of your startup ahead of applying for a loan.
Of course, when entering into any finance contract, be sure to seek independent, expert advice.