Securing a business loan is only half the challenge.
The bigger battle is to ensure that the money you raise is fueling growth in the right way.
All too often, entrepreneurs accept any financing offer that comes their way, without considering their long-term strategy. That short-term approach is a road to regret.
The problem is:
Instant gratification produces instant headaches. Business owners can be tempted to take out a quick loan just to make payroll or cover another short-term cash crunch. These decisions can damage future growth and profitability.
The good news?
With the right planning and guidance, business owners can learn how to align financing with long-term strategic goals. The result is sustainable growth and improved cash flow management.
This article covers:
- Why Strategic Financing Is Key for Business Growth
- Common Business Financing Mistakes to Avoid
- Matching Funding Types to Specific Business Objectives
- The Components of a Successful Financing Strategy
Why Strategic Financing Is Key for Business Growth
Financing for your business isn’t a one-size-fits-all proposition.
In fact, no two companies have the exact same needs. Your business’s unique goals determine what funding sources are best for your needs.
Consider this:
A startup that’s looking to take things to the next level has very different needs than a more established small or medium business that’s seeking to expand into new markets.
The key is understanding the role that financing plays in your overall business strategy. When entrepreneurs approach a business loan and other financing options with a clear set of goals in mind and use good business advice to guide the process, they set themselves up for success down the road.
Businesses that focus on financing as a core aspect of their growth strategies will experience real benefits as a result. In fact, recent PYMNTS research found that 54% of SMBs with revenue over $1 million have begun using financing as a business strategy, rather than simply a last-minute solution.
That’s pretty exciting when you think about it.
The way we use financing is starting to change. It’s evolving from something that entrepreneurs turn to only as a last-ditch effort into a strategic tool that helps drive sustainable growth.
Common Business Financing Mistakes to Avoid
Okay, so the ‘why’ is covered. What about the ‘how’?
Before we jump into the nitty-gritty of strategy, let’s review some of the most common mistakes that business owners make when it comes to financing. These missteps cause many unnecessary headaches along the way. Avoid them, and you’re already way ahead of the game.
Here’s a quick list:
- Jumping at the First Option
- Ignoring Repayment Terms
- Waiting Until the Last Minute to Act
- Borrowing Too Much or Too Little
Jumping at the First Option
Desperation is a terrible decision-making tool.
Business owners that accept the first financing offer they come across are usually doing so out of desperation and fear, which naturally leads to accepting higher interest rates and less favorable terms.
Smart business owners comparison shop for financing, weighing their options before making a decision.
Ignoring Repayment Terms
Monthly payments that seem manageable on paper can have far-reaching effects on a company’s cash flow. Monthly payments can quickly add up, leaving less money to invest in business development and growth.
Repayment terms can become even trickier during the slower seasons when revenues naturally dip. The best financing plans build in a cushion to account for that.
Waiting Until the Last Minute to Act
This one is a no-brainer. Desperation is the worst time to apply for a loan, and lenders can smell desperation a mile away.
Waiting until you absolutely have to have the money before you reach out to a lender means that you’ve already lost leverage in the negotiation process.
Businesses with a formal written plan are 2.5 times more likely to secure a loan in the first place, so start planning ahead!
Borrowing Too Much or Too Little
This mistake goes both ways. Borrow too much, and you’ll be crushed under the weight of the repayment pressure. Borrow too little, and you won’t have the capital you need to execute your plans.
Finding the happy medium requires a good understanding of the actual needs of your business.
Matching Funding Types to Specific Business Objectives
Specific business goals require specific business financing solutions.
Here’s how to match them up.
Short-Term Working Capital Needs
Payroll, inventory costs, and other working capital requirements that come up on a seasonal basis all require short-term solutions.
Lines of credit, invoice factoring, and short-term loans fall into this category.
They provide a quick influx of capital with a relatively short repayment schedule that matches the short-term nature of the need.
Equipment and Asset Purchases
Purchasing equipment or other assets that will have long-term value for your business is a completely different proposition.
The financing should reflect the long-term nature of the investment. Equipment loans and equipment leases help you stretch out the payments to match the useful life of the asset.
Expansion and Growth
Major growth initiatives are going to need significant capital in order to take off. They also demand a certain level of flexibility.
Term loans, SBA loans, and equity financing can all play a role in this regard. Choose the financing that matches the time horizon you’ll need to see returns.
Expecting immediate results from a growth initiative is unrealistic, and the financing structure should reflect this reality.
Refinancing Existing Debt
Odds are you’ve already got some debt on your books. That doesn’t mean it can’t be managed or restructured.
In fact, consolidating existing high-interest-rate debt into a single low-interest-rate loan may free up some much-needed cash flow immediately.
That frees up more room for the business to invest in growth and expansion.
Building a Financing Strategy That Works
The process of building a financing strategy is not difficult.
It just requires a clear view of what you’re trying to achieve and a solid understanding of the tools you have at your disposal.
Follow these five simple steps, and your financing strategy will set you up for years of sustainable success.
- Set Goals for your business. Define where you’re heading over the next one, three, and five years. What capital will be required to get there?
- Assess your current financial health. This will include revenue and earnings trends, existing debt, and cash flow metrics. Lenders want to see these things.
- Consider the timing. How long until you need the money? Once the investment is made, how long until it starts producing returns?
- Build relationships with lenders in advance. Make sure you’ve got a good rapport with your bank and/or lending partner BEFORE you need the money.
It’s easier to secure financing under good terms when the lender already knows you and trusts you.
The reality is that companies that view financing as part of their overall business strategy outperform companies that treat financing as an emergency option time and time again.
In fact, according to a report by Guidant Financial, 64% of small business owners say they are profitable, with many attributing their success to smart financial planning.
Conclusion
Aligning business financing with long-term strategic goals is one of the smartest business decisions you can make as a company.
It is a smart approach that requires you to:
- Understand your goals and objectives
- Be honest with yourself about your needs
- Match your financing choices to your goals
- Plan ahead and be proactive about your options
- Build good lender relationships over time
The result is a company that is well-positioned for sustainable growth and success over time. That success will elude all those companies making decisions based on instant gratification or ‘good enough’ financing solutions.
Bottom line? Strategic financing is not about getting the largest amount of money possible.
It’s about getting the right money at the right time for the right purpose. Master that, and you’ll be well on your way to setting your business apart from the competition.
