Most businesses need financing or will need financing at some point. Cash flow is different from profits, so profits do not guarantee money in the bank. There’s financing needed to manage starting costs, inventory, waiting to get paid, and other factors.
People think of financing as debt or borrowed money. In this context it includes investment capital as well. Either debt or investment is outside financing that helps a business meet expenses and grow. Smaller businesses can get by without financing and some medium and large ones too, but most businesses need money to get started, to grow, and to supply their regular needs for working capital.
Your business plan needs to tell you whether you need financing or not, and how much if you do. It should estimate cash flow for your company and if cash flow is negative, then you plan to add money as either loans or investment. One of the most common reasons businesses need financing is “Accounts Receivable”. Most business-to-business sales involve delivering an invoice and waiting to get paid. Businesses that sell this way have to deal with collecting money owed, and while they wait to collect, they have bills to pay. With financing, they will have the money they need to help cover the costs.
Another reason people need financing is to pay for inventory. You need to buy things first to sell them. Often you have to pay for your inventory before you sell it. That means you need financial resources to deal with pay cycles.
Start-up businesses often need financing to cover their initial costs and expenses while they are starting before they can start selling.
A correct business plan process will point out the gaps that need to be filled with financing. For a start-up company, use the plan to help calculate needs and early expenses and the early deficits as the company gets started, and then plan to fill those needs with borrowed money or investment. If you cannot get enough funding to cover the needs, then you must either change the plan to reduce the needs, or do not start the company. For an ongoing company, use the plan to calculate cash flow from normal operations, and turn to financing as needed to support working capital requirements.
If you realize at one point that you need financing, do not be surprised. Some smaller, cash-only businesses get by without financing. They sell for cash, buy in cash, and do not spend what they do not have. It is easier to get by without financing as a service business than a product-based business because you do not have to deal with inventory.
Once you have determined your costs and projected your cash flow, you will need to figure out how to pursue the financing. Some potential funding sources include personal savings, loans from friends and family, bank and government loans, and grants are just a few potential funding sources. There are many companies who use a combination of different sources.
Additional funding can come through establishing business credit and different lines of credit through piggybacking scenarios. There is also small business and loans and angel investors willing to step in. Other types of financing to look into is alternative small business lenders, traditional bank loans, angel investors, lines of credit, SBA guaranteed loans, crowdfunding and more.
It might seem that that all the variety of financing choices can be used to fund your business, but make sure to research all of them. A part of understanding the signs of funding a growing business is understanding the best funding choices available. Understand that you will have to eventually pay back the loan, and paying it back comes from the profits.