How to Conquer the 5 Financing Problems: Be the First to Know

Last Updated on December 4, 2022 by Selina Parker

Every business owner has a vision of success and growth for their own business. But what happens when you find yourself facing financing problems? You may be to take out a loan or give up on your dreams, but other ways can overcome these financial challenges.

Funding for working capital is crucial for any small business to get off the ground and grow into something that can eventually be self-sustaining. If you are running out of money, it’s essential to know your financing options so you don’t get stuck in a position where your business must close its doors.

This article will discuss some of the most common problems small businesses are trying to raise capital to keep their business afloat and how you can overcome them. We’ll also provide tips for finding alternative sources of funding for any small business administration that might not require any collateral.

Financing Problems Most Business Owners Face When Funding their Business

Developing a scalable business model

Whatever your purpose for taking out a loan, whether you’re expanding a small firm or seeking venture capital, you’ll need a scalable business plan. Investors are especially interested in funding scalable or ready-to-scale enterprises. In the immediate future or years, your company model must demonstrate the ability to grow revenue while incurring minimal expenses.

How can you do it

Have a Scalable Business Idea
It implies improving profits without having to increase operating costs at the same (or greater) rate. Sure, it should be distinct. However, without scalability, it is less likely to attract investment.

Usually, scalable business models have more significant profit margins and less infrastructure and marketing investment. While your company model grows, it must remain aligned with the company’s essential services.

Investors and lenders will be hesitant to welcome you openly if your business model is likely to cause time, finances, or operations overextension.

Build An Effective Business Model
Your company model should be able to support your growth objectives, which are to raise money. It is an integral part of staying competitive, so you may need to look at things differently.

The only way to do this is to go back to the basics and ensure your business model is effective.

Consider Outsourcing Non-Critical Parts Of Your Business To Save Money
It could include getting an outside company to take care of your marketing and advertising.

Determining the amount to ask for your business financing

Regardless of the type of funding, you have to be specific with the amount you want. Most people would advise you to lend as much money as possible. In many situations, though, more isn’t always better.

How can you do it

Create A Business Plan
You can’t plan how you’ll spend the cash without a business plan. Most investors (and most banks) will advance your project without a thorough business plan in most cases.

In addition, you must have a feasible financial forecast in your business plan. You should estimate the anticipated cost of the investment or loan and the future returns it will provide. You must explain all projected data, facts, and figures.

Be Specific and Detailed
As business owners, be as specific and detailed with your financing requirements. You should clearly define the amount you require, why it’s needed, what you can do to repay the debt, how much interest is charged on repayment of debt or loaned funds, etc. It would also help if you could provide resources that this financing method has worked in the past.

Demonstrate Your Company’s Positive Cash Flow
Positive cash flow raises the likelihood of receiving requested funds for most startups and small businesses. Some financing options require cash flow, so proving this is crucial.

How much money will you need to build a functioning financial model? Determine where your cash flow levels out and add an adequate buffer. Check to see if your funding request is by your financial objectives.

More investment isn’t always better

Every day, firms that have received many investments fail because they cannot handle the rapid growth. Although it could be helpful to scale your business quickly, it increases your risk of failure.

Selecting the right funding option

It is the biggest challenge you’ll face. There are many available financing options. To improve your chances of getting the fund, you must select the most suitable funding alternative. You may sometimes need to utilize more than one option to finance your business.

If you can’t decide which funding option is suitable for your business, The Fully Funded Method is what you need.

1. Bootstrapping or Self Funding

The ideal (and cheapest) method to finance your firm is to use your funds or borrow from family and friends. It’s a popular funding option due to flexible investment terms and availability.

Use your savings and income
Tapping into your 401(k) or personal savings may look appealing. However, if things don’t work out, you risk losing your company and retirement fund. Many entrepreneurs prefer to balance running their firm with a day job until success.

Family and friends
Borrowing money from family is more accessible than attracting financing from strangers and equity investors. It can be a great option, but it may lead to family conflicts if your business fails or defaults on payments, so it’s better to comply with this with legal obligations.

Credit cards
Individual entrepreneurs and small company owners may find that their bank provides unique credit cards tailored to them. It might be a simple choice for existing customers if you have healthy credit. But it’s also the most expensive alternative because credit card debt has high-interest rates.

Personal credit cards force you to be personally liable for a business failure. Furthermore, if you miss a payment, your credit score will suffer, limiting your chances of obtaining capital in the future.

2. Bank Loan

It is the most reliable option for financing your business. Big banks offer financing in the form of term loans, lines of credit, or revolving credit—all with fixed interest rates and repayment schedules. 

The SBA does not directly manage loans, but it promises to reimburse part of the loan if you default on an SBA-backed loan provided by your bank. It enables banks to take a chance on lending to small firms that might otherwise get rejected.

Traditional bank loans generally require two years of tax returns, which show gross and net earnings. In other words, you’ll need a good credit history. Banks will also want to know whether you have any assets that you can pledge as collateral. They’ll always want your entire standard business plan, including financial statements or projections and personal and business credit.

3. Angel Investor

Angel investors may be more flexible than venture capital firms regarding investment terms. They typically invest a large amount of money in exchange for equity in the firm.

4. Venture Capital

Like angel investors, venture capitalists are individuals who invest in early-stage businesses. They typically invest more than $2 million. They can offer guidance on how to grow your firm and will almost certainly want a voice in how to run it.

5. Crowdfunding

Crowdfunding can help you find a large number of investors and, as a result, attract media attention for your business. However, crowdfunding campaigns need dedication and effort, and whether or not you’re successful often depends on your existing network’s capacity to lend support. Furthermore, some platforms may refuse to provide funding if you do not meet the goal.

Spending the funds wisely once you get it

It can be the most challenging step in getting the money. Spending money on frivolous items may seem appealing. The best way to avoid this is by:

Sticking To The Plan
Stick to what you have initially planned. You’re accountable to your investors for following through on what you promised with their money, and you should be transparent if you’re considering a shift in direction.

Invest Wisely In Tech
Before you spend the money, take a look at your technology needs.

Find out what updates to your company’s software and hardware are available, and select the most cost-effective yet feature-rich alternatives. It would help if you always focused on technology expenditures and should always be focused on future marketing and branding opportunities.

Keep Investors Informed
The chances are that you opted to seek outside capital, and your contract stipulates that you will pay the investors in full at the appropriate time. However, demonstrating that their money is in good use can help create a relationship of trust between you and them.

If you’re searching for different strategies to raise capital without selling equity, The Fully Funded Method got what you need.

Don’t forget to download our workbook, “The Fully Funded Method Manual,” for more information about financing!