Wendy Smith, Accounting and Financial Advisory & BPaaS Regional Leader at Deloitte in the Western Cape, shares the secrets to ensuring that your application wins over the financiers.
When applying for funding for your growing enterprise, your chances of success are increased if you prepare well in advance and apply innovative thinking to developing a sound motivation to support your application. The secret to ensuring your success, however, is if you prepare your own due diligence before commencing the application process. Once you are clear on your motivation and requirements, you will be in a much better position to engage with investors and financiers.
Firstly, you need to evaluate the reason for your business needing additional finance. Consider whether your existing business is trading optimally and is not leaking funds. Be sure you have tested and evaluated the basic 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 supporting motivation to determine the purpose and amount of the money you need. Ensure that you have accounted for any contingencies. Then, be specific in your request for finance. For example, it is much easier to request a specific machine that will give you a carefully calculated output and return on its purchase price, rather than an entire factory. You need to be specific as to how you are going to apply the funds and what the expected return will be.
In addition, you need to demonstrate that you have considered ways of managing without borrowing. 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?
The notion of growing too fast is often overlooked during the funding process as not all growth is good. The cost of funding exponential growth, which will require a bigger investment in working capital and assets, can sometimes be crippling to a business. A decision 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 business growth, you need to show that you have invested in this growth yourself.
When requiring finance, consider whether the timing is right. For example, institutions very seldom lend money to someone whose business is undergoing a crisis. This includes crises that are caused either by poor cash flow management or because of a quicker or bigger than expected growth phase.
Because financial institutions are generally risk averse and have fairly long loan approval processes, you must anticipate a period of at least three to six months from the date of application before you get any money. The best time to borrow is when the going is good and when you have constructed a robust business plan, and you have a working business model with a steady turnover and a large margin of safety.
While you wait for your application to be considered, find alternative ways of continuing with your business activities. By demonstrating your ability to be sustainable, it helps build collateral as you continue with business as usual, making you a much safer bet for lending institutions. As your business becomes established, lending institutions will become more interested in you, so you can always re-apply for finance at a later stage.
