Need extra cash to move your business forward? Maybe you want to hire new people, buy a building, expand your inventory, or take your business to the next level, whatever that may be. Word on the street is that banks have money to lend.
Here are five questions you should consider before you begin the funding process:
1. How much is my business worth, today?
This is crucial for banks and investors. Is your company/business worth enough to cover the investment? Hiring new workers is a key motivation in today’s high market of unemployment. Even with an investment or a loan, hiring new workers means having a sustainable business model that is going to last more than another year or two. Those new workers want some long-term security, as do your investors.
2. What is the money really for?
If you tell your banker that you need to hire new workers, you better be prepared to support that statement. How many new workers? What will they do? What are the working conditions? Do you have people in mind, already? Being able to describe the roles you need to fill and how much they need to be paid, along the ability to say, “I have four people I’ve been working with on a contract basis who are ready to be full-time employees,” goes a long way to building credibility.
3. Can’t you fund your expansion yourself?
For many of us, that’s a no-brainer. If you can help it, don’t take on an interest-bearing loan or become indebted to investors. The problem is that while many businesses today are doing well enough to limp along, they’re not well enough to hire new people or mortgage a bigger building. Without additional workers or extra space, these companies will not be able to grow.
4. What is your projected revenue for the next five years?
Some folks predict five years out, while some are only looking three years. Regardless of how long you’re willing to predict forward, you still need to show a revenue line that covers the growth and the investment. No one is going to give you funds if you’re merely trying to stay alive. You must show the opportunity for growth.
5. Do I have a strong executive team to manage growth?
Existing companies looking for growth funds need to show the ability to manage a solid executive team and the growth that follows. You can’t expect a bank or other investor to approve new cashflow if Cheryl from marketing hasn’t produced anything for the company except lunch expenses, or if Patrick has hired two mediocre sales people for his team and failed to meet quarterly goals, or if the head of Business Development needs some new development. If you’re doing all the work yourself despite having an executive team, you’re essentially asking someone to invest in you. And, seriously, how much are you really worth?
There are more questions to ask than just these five. In an economy that is struggling to bring back the good old days, establishments in the business of investing funds to small business owners are only doing so when the small business owner can justify those funds and show a profitable return.
If you think it’s personal, you’re right. It is personal — personal enough to ask you a lot of questions about prior year’s income, to the point of asking why you purchased a new car last year. Really, did you need a new car? It can get personal enough to ask why you haven’t used the $25,000 you have in savings, which they know you have because you gave them permission to review your finances. It’s even personal enough to include questions about why you haven’t tapped into family and friends first.
The act of supporting businesses with added funds, whether from family and friends, a bank or a VC, involves pretending you can guarantee a return on the investment. Everyone knows there is no guarantee.
“How much of your own money are you going to put in?” a banker asked a friend of mine looking for funding to expand her two year old business.
“If I had my own money,” she said, “I wouldn’t be here asking you for yours.”
She didn’t get the loan. Will you?
Editor’s Note: This article was previously published at OPENForum.com under the title: “5 Questions to Ask Before Going for Funding.” It is republished here with permission.
Sometimes getting a loan can be an investment. If you could produce a 20% gain on additional funding and the interest rate is 7%, you will make nearly double what the bank does AND grow your business.