Often times, web development and web design firms find themselves in a situation where they have low funds. That’s simply the nature of the business; there are high seasons and low seasons, great years and not so great years. There’s more to making a business work than simply being good at what you do. If you run a company, then you are first and foremost and manager who should be making managerial calls on issues outside your domain. This article can help you understand the concept of business financing a bit better.
Business loans are the lifeblood of smaller companies, and if you need to get a cash injection for your tech company, there are a number of considerations you should weigh up before taking action.
The first is whether you need to get a business loan at all, or whether you might be able to raise the cash you need by changing business practices and releasing cash that is currently being wasted. Often companies can find cost savings within their existing processes and creating additional efficiencies can sometimes solve a cash-flow problem.
The second consideration is whether your team works at full capacity. Can headcount be reduced? Redundancies are not nice but they may unlock additional funds from payroll savings.
The third consideration, is what is your data telling you? Fully detailed performance reporting of the past 1 to 5 years should inform your decisions. In addition, you will need a solid business plan that demonstrates to yourself and your management team what can be achieved and when you are likely to improve your cash-flow.
Following the process described above, you may decide that you want to borrow funds. It could be for a concrete purpose like buying a machine or recruiting a certain person or it could be just to finance your ongoing operations. Whatever the reason is, deciding you want external funding is just the beginning of the process.
Bank Versus Lender
There are a lot of lenders out there in the Australian market and picking the right company or bank to provide you with the funding is essential for a healthy and useful process. The ins and outs of each lender and bank are too difficult to explain, but showing the differences between the two is very possible.
As per this comparison between banks and online lenders made by Small Business Loans Australia, non-bank lenders are generally more expensive, less difficult to deal with and are much quicker to respond than banks.
How Much do You Need to Borrow?
Your first consideration should be how much money you need to borrow from the bank. It can be tempting to keep the amounts to a minimum, so you are not paying out more than you need to. But borrowing too little can be as problematic for a business as borrowing too much, because it could mean being forced to return to borrow more sooner than you might otherwise be comfortable with.
A good rule of thumb will dictate that you will need to borrow funds to keep your business alive for at least 6 more months at current revenue pace, or will help facilitate such a line of cash-flow earlier. That rule of thumb will also say that you should never borrow money for periods shorter than this, because this means you will need to borrow additional capital within the next months.
So, be realistic not only about the amount you need to borrow, but the amount you are likely to be able to borrow and choose an amount that allows you to achieve your aims without creating additional cash-flow stress for you or your business.
What Will Your Bank Need to Know?
Once you know how much you need to borrow, prepare your documentation to take to your bank to convince them that your business is a good ‘risk’ for it to loan to. Your bank will need to know what you want the business loan for – and if you are a start-up or a relatively new business, you may find it difficult to give these details exactly.
Remember to take your business plan and financial statements, with these it should be easier to demonstrate what the money you are borrowing will be used for. Your financial statements will give your bank a clear indication of your profit and loss, cash-flow, assets and liabilities.
Creating your bank-oriented business plan
Spending time researching your business and the market you are targeting is essential to create a viable business plan. It can take more time researching a good plan than it does writing one, so be prepared to put in the leg work.
That loose business plan you’ve devised before even applying for a loan? It’s mostly irrelevant because banks can be overzealous when it comes to business plans.
You also need to provide a strategy for marketing, your product development, and your financial forecasts to show any potential investors, including a bank or other institution lending you money, where your business is likely to be in three to five years.
Your credit score
One of the key measures which determines whether your bank will lend you money will be your credit history, whether that is just for your business or your own personal credit history too. If your business has not been established for long, your personal credit score will be taken into consideration. So ensure you have spent time cleaning up your own credit score if you are trying to borrow at an early stage.
Most companies do not know what their credit score is, or how to improve it. Almost three out of five small business owners have never checked their credit score according to research from Experian and that is not good business practice.
Make your credit score more healthy
Any lender will check your company’s credit score, and you should be checking this yourself on a regular basis. As the Experian website states: “A healthy credit score is made up of three key elements: robust information, sound financial management and regular monitoring.” If you have applied for a number of loans in quick succession, these credit searches for each institution will be listed on your credit score and could be detrimental. Lenders will be concerned about that kind of action, as it suggests a desperate pattern of behaviour that flags your business as having a higher level of risk.
It may be that you need to spend some time working on improving your credit score to make your business more appealing. You can do a number of things to achieve this, such as paying any invoices due promptly, collaborating with your suppliers so they provide feedback on your payment records, and providing as much additional data to credit reference agencies as you can. It has become harder for businesses to get a loan, so the more you can do to improve your business’s chances, the more chance you have of getting the money your business needs to grow.
What will an Online Lender Need to Know?
Generally speaking, online lenders are more technology oriented so a lot of the legwork should be done automatically. Upon signing up you will need to provide either certain documents from your bank, and/or connect the lender to your credit card processor or PayPal account to verify the levels of revenue. The decision whether your web design or web development business be approved will be done automatically with little to no human involvement and the reply will be sent to you in between 1 and 72 hours.
Final words – How to Treat Business Loans
A business loan is not an easy decision to make and is not an easy process to initiate in. Unless you need funds urgently, you will need to develop patience and endurance. Financing your business is a marathon and not a 100 metres sprint.
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