Ashley Njeri

Tips for financing your growing business Your business is doing well; you have clients, and you are moving in the right direction. Now it’s time to grow! Remember when you started this journey and you needed capital? The same applies during the growth phase. You are probably thinking of switching to a major technology upgrade or maybe looking to buy a major piece of equipment. Without a doubt, you will spend hours researching and looking for the product that best suits your needs. The hard part is where you will get the finances to pay for the product you want, and this is where many entrepreneurs go wrong. To help you, let’s look at tips for financing your growing business. How to finance the growth project Many businesses often make the mistake of financing growth from their cash flow or taking different smaller loans for each equipment they intend to purchase. Even when your business has a positive cash flow, it will hit an unexpected speed bump along the way. This will mean cash flow stress and dried-up revenue. Being a growing business means your money is in the form of long-term assets, and even then, it might be too late to approach a bank for an emergency loan. Even when cash flow is good, it may not always be like that. When purchasing a long-term asset like new equipment, it is best to seek a loan. The repayment terms of your loan must match the asset's anticipated life span. Your everyday sources of cash are appropriate for short-term expenditures such as office supplies and utilities. Tip: Even when the cash flow is positive and the profit substantial, it is better to seek a loan when purchasing a long-term asset. Financial planning You are very determined to grow the business, but your investment will stretch without financial planning, and your cash flow will drop. Financial planning will protect your business. Take time to make a financial plan for the upcoming investment, and this starts by first understanding how much you need depending on the projected growth. Talk to your lenders - many vendors are willing to finance your loan as long as it is a win-win for both of you. Talk to financial planners and secure a credit line for the investment. The idea of financial planning is to get a loan under the best possible conditions. Consequently, financial planning helps you understand if you need more than one financial partner to fund the investment, which gives your business more flexibility. Tip: Invest your time and effort in financial planning and watch your business stand firm from unexpected speed bumps. Before signing up for that loan, however, it is essential that you understand how loans work. Understanding how loans work Acquiring that major technology upgrade or purchasing significant equipment undoubtedly requires a substantial amount of money. Large loans are structured in a very confusing manner and can result in huge debts, something you don't want for your business. Therefore, it is crucial to understand how a loan works before you can borrow money and thus save more which is a plus for your business. Some key loan elements you need to understand include: Principal- This is the original amount of money you are borrowing. Terms – This is the amount of time within which you must pay the loan back. Interest rates- this is the amount the bank will charge you for borrowing money. Understanding the cost associated with each loan will help you choose one that best works for you. When applying for a loan, the lender will not always tell you upfront all the costs associated with the loan. As a matter of fact, they put the terms in such heavy and confusing financial and legal terminologies. Interest is critical to consider before applying for a loan. Different lenders have different interest rates, and that means varying amounts of total interests with each lender. Some lenders will require you to pay fees on loans. The most common types of fees include application fees, processing fees, annual fees, late fees, and prepayment fees. Not all loans have this fee so consider asking the lender about them. Tip: Look for a loan with a low-interest rate and with no or minimal fees and ensure the terms work best for you. Getting a loan Now that you have seen loans work, it is time to choose a loan with the best possible conditions. When acquiring a loan, the bank will assess if your business is worth the risk and if you are in a position to repay your loan. To convince the banker that your company's assets and performance show an acceptable level of risk, you must satisfy the 5Cs of lending. Capacity- Ensure that your track record and credit history show an ability to repay the loan. Pay all your bills on time and ensure that your credit lines are not overused. If you show the banker that you are willing to invest significantly in the growth of your business, they will be willing to share the risk with you. Character- Boost your credibility by showing the bank that your management team has the skills, experience, and track record of delivering. Create a good impression from the way you dress, talk and conduct yourself because it’s from here that they will determine if you can manage the new investments. Capital-your bank will analyze the liquidity, growth, profitability, and cash flow of your business. Conditions- A good loan offers the best working condition for you and the bank. Ensure that whatever conditions your bank sets, they remain reasonable and present acceptable risk to the business the entire period. Collateral- What assets are you willing to provide as collateral? Though crucial, you need to understand that collateral is the least of the bank's priorities compared to the other 5Cs. Tip: Your banker may be your source of money, but they can be the source of good advice. Please don't shy away from asking for it!