Once your small business gets off the ground and begins to grow, there will be times when additional funding is needed to sustain growth. However, determining if and when your business requires funding can be challenging. While it's clear that extra funding can help manage cash flow fluctuations and economic downturns, you might assume that if your company is enjoying strong sales and profits, there's no need for additional funding. However, this assumption can be misleading.
This Huddle Business Capital blog article discusses six signs that your small business needs funding. By understanding these signs, you can make informed decisions about seeking financial support for your company.
1. Cash flow fluctuations.
A healthy cash flow allows your small business to meet its financial obligations, pursue growth opportunities, and weather slow sales periods. Fluctuations in your company's cash flow can lead to issues. The Small Business Administration's SCORE program reported that 82% of small businesses fail due to cash flow problems, making it the number-one reason for business failure.1
Common causes of cash flow fluctuations include delayed payments from customers and vendors, decreased sales revenue, and rapid business growth. Seasonal businesses are also prone to cash-flow issues, as they might generate solid revenues during a particular time of year (e.g., summer months, winter holidays) but experience moderate revenues during the remainder of the year. If your small business doesn't have a stable cash flow throughout the year, additional funding can help bridge the gap.
2. Growing demand for products or services.
When customer interest in your products or services increases, your business must be prepared to meet this demand. Failing to do so can result in lost sales opportunities, unhappy customers, and negative word of mouth. You can navigate these challenges by stocking up on inventory to ensure that you can fulfill customer orders without delay. Plus, maintaining adequate staffing levels can improve customer service.
Inventory purchases and employee payroll are critical components of running a successful business, especially when there is an increased demand for products or services. A working capital loan can provide the necessary funds to cover these expenses.
3. New or upgraded equipment is needed.
As your small business grows or expands, you must consider investing in new or upgraded equipment to support this growth. This could involve purchasing advanced equipment or machinery to boost production or acquiring the latest technology and software to manage inventory and help provide better customer service. Business equipment can be costly, and buying it outright can drain your company's savings.
Two viable solutions worth considering are equipment financing and equipment leasing. These options enable you to procure equipment without a big one-time payment. Equipment financing, also called an equipment loan, involves making predictable monthly payments over a set time frame. Once you make all the payments, you own the equipment.
Equipment leasing is slightly different because you make predictable monthly lease payments to use (rent) the equipment, but once the lease concludes, you don't own the equipment. That said, many lenders offer the fair market value (FMV) option, which lets business owners purchase the equipment for its fair market value when the lease term ends.
4. Mounting debt.
Yes, taking on a working capital loan or SBA loan means taking on more debt. However, this strategy can be beneficial if you consolidate your existing loans into a new one with a lower interest rate. By refinancing to a lower-rate loan, you can reduce your monthly payments and overall interest expenses. This can help improve your cash flow and allow you to save money for other business needs.
Ask your lender about the loan's borrowing terms, interest rate, and potential consolidation fees to ensure it meets your business's needs and budget.
5. It's time to expand.
To take your business to the next level, you will need capital. Expanding your current location, opening a second location, moving into a new market, and introducing new products or services can be expensive. These expansion initiatives carry costs, such as moving/renovation expenses, marketing/branding efforts, staffing needs, and operational costs (e.g., insurance, inventory, utilities, permits).
Obtaining a business loan can be a strategic move to ensure you have the necessary funding to cover expenses related to your expansion plans. By securing a loan, you can move forward with your expansion efforts without depleting your company's cash.
6. Contracts need to be fulfilled.
If your small business makes goods and lands a contract that exceeds your current production capacity, you might miss out on a valuable order. Failing to meet such a demand affects your company's bottom line and reputation. To prevent this from happening, consider applying for business funding to help fulfill the order.
Depending on your specific needs, the funds can be used to hire additional workers, invest in production-related equipment, or subcontract the work to another company.
Conclusion.
Securing business funding offers benefits outside those listed above. For starters, it can help build business credit, provided the payments are made on time. Next, business funding, particularly a business line of credit, can be a preventive measure against overdrafts. The credit line can be used to cover business-related transactions in the event that a company's checking account lacks sufficient funds.
Source.
1 - https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind. Huddle Business Capital is not affiliated with nor endorses the Small Business Administration (SBA) or SCORE.org.
