*by Wendy Smith
Applying for finance can be a slow, frustrating and disappointing process. But your chances of success are increased if you prepare well and apply innovative thinking when developing the motivation to support your application. Being clear about your motivation and requirements will put you in a strong position when engaging with investors and financiers.
Why do you need the funding?
Firstly, evaluate the reason that you require additional finance. Consider whether your business is trading optimally or if it is leaking funds that could be used to fund your growth. Test and evaluate the fundamentals of your business. For example, if your selling price is too low, or if your expenses are too high, your business may not be profitable. If this is the case, then further funding will be more of a burden than a help.
Next, complete a detailed budget and motivation to identify what you need the money for and how much you need. Be sure to account for any contingencies and be as specific as possible. You are more likely to meet with success if you request funds for a specific machine that will give you a carefully calculated output and return on its purchase price, rather than an entire factory. Specify how you are going to use the funds and what the expected return will be.
In addition, you must show that you have considered how you will cope if your application is unsuccessful. For example, have you considered lease options in the case of equipment, or in the case of funding extra stock, have you explored all credit provided by your suppliers?
Growing too fast?
The idea of growing too fast is often overlooked during the funding process; but not all growth is good. The cost of funding exponential growth, which will require a bigger investment in working capital and assets, can cripple a business. Deciding to increase the sales level in your business is a long-term commitment and requires careful planning. Before a financial institution would consider funding your growth, you need to show that you have invested in this growth yourself.
Funders are unlikely to lend money if your business is in crisis mode. This includes crises that are caused either by poor cash flow management or because of a quicker or better than expected growth phase.
Is the timing right?
Consider whether the timing is right. For example, funders are unlikely to lend money if your business is in crisis mode. This includes crises that are caused either by poor cash flow management or because of a quicker or better than expected growth phase. Financial institutions are generally risk averse and have fairly long loan approval processes, so expect to wait anywhere between three and six months from the date of application before you get any money. Remember, the best time to borrow is when the going is good and you have a working business model with a steady turnover and a large margin of safety.
While you wait for an answer from funders, find alternative ways of continuing with your growth plans. Showing that your business is sustainable will make it far more attractive to lending institutions. As you become more established, funders will become more interested in you, so you can always re-apply for finance at a later stage.
*Wendy Smith is the Western Cape and Namibia Regional Leader of BPaaS and Accounting & Financial Advisory at Deloitte. Her primary technical skills are in Financial and Performance Management, comprising all aspects of financial management accounting and advisory support. Wendy has over 30 years’ experience in financial management and advisory.