Thinking of how much hard money to raise for your business?
This page will guide you on how best to answer the how much! question and also boost your confidence at meeting prospective lenders expectations.
To qualify for credit, your potential financiers must be able to satisfy them selves that the risk potential of your business is within their acceptable limits, and termed as good.
For that reason, you must be fully prepared to have every aspect of your existing or planned business subjected to intense scrutiny and be able to justify that you will put their hard money to effective use and also pay interest accordingly.
Although the procedures and processes may differ slightly from one funder to another ? two rules of thumb will serve across the board: 1. Be prepared.
2. Don?t even think about looking for a penny of fundingunless you have a good business plan.
Preparing your business plan will help you define and identify your goals, and should bring to light any issues that you?ll need to address before you begin to look for who to provide you with hard money.
Let me put it this way. Surprises are great for birthdays and holidays, but no good comes of them when you?re meetingwith a potential source of financing.
Let?s drill down to some specific questions you should be fully prepared to answer with confidence:
First, why do you need financing? And how will the capital help your business? Most lenders require that you apply for capital for a specific purpose.
Second, organize your thoughts about your specific financing need. Is it urgent? Is it short- or long-term? And how much hard money will you actually require?
Obviously, you?ll get the best terms when you anticipate a shortfall or growth opportunity well in advance, instead of looking for money under pressure.
You?re much more likely to receive a positive response from a potential lender by stating the amount you need instead of asking them:
?How much can I get in order to sustain my working capital requirements over the next three months??
Let me give you an example of how to get specific with the two points I just made. If you were in a manufacturing business, it might go something like this:
?We intend to add 7 machines to our existing plant which will allow us -to increase output by 4,000 units or 15% a month and generate a projected $2million or 10% of additional sales per year.?
Obviously, this is hypothetical ? but I can?t over-emphasize how important it is to be specific, and to be sure that the benefit to your business is clearly stated and expressly obvious.
Why? Third Ask yourself ? ?Do I have a realistic plan to generate funds to repay my hard money debt within the specified period??
No lender will approve a financing request that isn?t presented as a recoverable risk.
Make an objective assessment on the strength of your management team and support staff?
The collective experience of the people who lead and carry out your business is critical to getting funding approval. Do they have special training? Are they members of professional groups or trade organizations?
By asking your self questions about the strength or weakness of your management team, you?llbe able to close any gaps before you seek out funding.
Rest assured, your potential funding source is going to be looking for technical flows in your management team. So, if there are any, your best bet is to identify them and fix them first.
Now, lets move on to the specifics of a well-prepared business plan that will support your request for funding ? and guarantee your ability to will the lenders confidence in you.
Draw up a budget based on your business plan (see Writing a business plan).The budget shows your forecast sales, expenditure and, most importantly, cash position for each month.
Your forecasts must be realistic and justified.
Most un successful business people invariably make over-optimistic forecasts.
The end result being Sales turning out to be lower, or are realized later than expected, a poor credit policy on management of cash, and operational overheads exceeding budget.
Identify how much financing you require and when you will need it.
Allow for some contingency funding. How much extra finance might you need?
Plan to arrange all your financing. Even if you don?t need all the hard money at once, don?t wait until your need for the extra finance becomes urgent. For example, borrowing $50,000 in January and then asking for $40,000 more in April may alarm your bank manager.
Let the bank know the total amount you need in the first place, after which you ask to borrow it in installments.
Planning for the right hard money to run a business involves lots of future uncertainties and may require application of risk assessment concepts to facilitate decision making. Consulting your CPA might save you from making risky and costly decisions, or contact us, for online support.