Sooner or later, most businesses have to turn to external sources to finance growth, whether it is to invest in new equipment or machinery, to purchase property, to upgrade technology, or to maintain cashflow while a new product line kicks in. The cost of external financing can be considerable and keeping it down is a key element in maximising your profitability. Here are three ways in which you can do this:
1 Plan ahead
Plan your financing requirements well in advance – if possible as much as a year before the funds will be needed. This will give you time to prepare a robust application, shop around for the best source, and negotiate the most favourable terms. Indeed, the mere fact that you are planning your funding so far in advance will earn you brownie points with most sources! If you leave your funding to the last minute, not only will you limit your negotiating power, you might also give the impression that your expansion plans are not very well thought-out. Of course business owners need to be agile and respond to opportunities swiftly, but this does not alter the basic fact that quick money is almost invariably expensive money.
2 Make the lender bid for your business
Approach a number of sources with a well-prepared funding requirement and ask them to submit a proposal. These days, even banks are used to having to bid for your business. Ask banks for an overall proposal that covers every aspect of your business. But don’t just look at the costs – consider also factors such as the quality of the working relationship, depth of knowledge of your industry, etc. Use your track record to leverage a better deal on charges or the amount of collateral required. Remember, the main concern for a lending source is the degree of risk involved, and a good track record will help mitigate this.
3 Ask for more than you need
Many business owners are overly modest in their funding applications fearing that if they ask for too much it will reduce their chances of success. But it is much worse to underestimate your requirements. Returning a few months later to ask for a top up not only sets alarm bells ringing about the reliability of your business plan, it is also a lot more expensive to process two applications rather than one