However well you prepare, the ever-changing financial landscape can catch you off-guard with little in the way of financial protection.
According to research by US Bank as reported on Business Insider, as many as 82% of small businesses fail because of poor cash flow management.
You can remedy this by taking emergency measures such as a working capital loan, but some signs will point out potential problems so you can fix them before they balloon out of control.
This guide examines the top 4 signs and symptoms that show you need to improve your financial practices.
Infographic provided by Seacoast Business Funding – business financing services
Importance of Business Financing
Business financing refers to raising funds or credit and availing it to start or run a business. It’s essential to have sufficient funding because:
It takes money to make money, so there’s no way you can start without funds. If you can’t raise the cash from your own pockets, it makes sense to seek financing from lenders.
Similarly, business finance is fuel for growth. If your business is excellent at what it does, demand for your services will outstrip what you can handle, forcing you to grow. One simple way to achieve growth is using funding.
The business world is not always smooth sailing–you will face a few financial bumps. As a smart business person, always keep some financing for those rainy days, be it in cash, wise investments, or maintaining a good credit score for future loans.
Financing is great for keeping debt in check. While debt is a normal thing in business, too much of it can cripple the industry. Keep debt under wraps by taking out business financing.
How to Tell You to Need to Improve Financial Performance
1. It Has Become a Hustle Meeting Client Demands
This is the clearest sign that you need to get your act together. That means you need financing to expand service provision and serve your customers better. The extra funding will help hire more staff, purchase additional inventory, upgrade systems, etc.
2. Credit Is Too High
Too much credit is a risk factor that will hurt your credit score. If your credit balance is consistently high, especially if it’s high-interest debt, you’re better off taking a line of credit and clearing it in easy installments.
3. Expansion
If there’s an unforeseen chance to expand, such as a chance to buy a strategic company that will improve your business but you have no cash, financing is the way. You could even get financing to build new business premises to eliminate lease costs.
4. High Inefficiency
When your workflow becomes compromised because of ineffective and outdated tools, it makes sense to take out financing. You are also better off getting rid of machinery when the cost of repairs and maintenance exceeds their economic benefits.
New technology eliminates downtime and increases efficiency and production, offsetting the cost of upgrades.
Types of Business Financing
There are different types of financing, and what you choose will depend on your individual needs at stages of your business:
Bootstrapping
Refers to financing from your pocket. It still is the best way to do it as there are no punitive interest rates, and you don’t have to give out a piece of your business.
Family and Friends
If you have well-to-do relatives, they can gift, loan, or exchange funding for a share of the business.
Small Business Grants
These are not loans, so you’re not obligated to repay. Private corporations and the local state, and federal governments do give grants.
Angel Investors or Venture Capitalists
Can significantly boost the business because they will also provide their expertise and networking to ensure success. Venture capitalists will always want a share of the company and only target organizations with potential for growth.
Loans
Conventional and online lenders are a great way to acquire financing, be it asset financing, invoice financing, or working capital loan. Traditional financiers have strict lending requirements, so you’re better off with an online lender if you don’t have a good credit score.
Suppliers and Customers
You can arrange with your suppliers or customers to provide financing, such as clients making early payments or making late payments for goods bought, in the case of suppliers.
Bits of Advice to Taking Care of Business Finances
Firstly, chase after payments because accounts receivables (outstanding invoices) will ruin your financial position. Send regular payment reminders to debtors and consider hiring a collection agency to go after rogue customers.
Secondly, lower expenses by scrutinizing every business expense and finding cheaper alternatives for services and supplies. In addition, find ways to eliminate unnecessary expenses and negotiate prolonged payments for significant costs. Moreover, create a budget and stick to it religiously.
Work on consolidating debt. That involves seeking financing to pay off smaller debts, so you concentrate all your loan payments into a single channel as it’s more economical.
It would be best if you also considered raising funding through sources that do not require you to pay back, such as business grants and crowdfunding.
One great way to improve your finances is to tweak your business model to ensure more cash flows. For example, offer more payment options as this will increase sales.
On the other hand, increase prices to get more profit, or lower prices to stimulate sales–just make sure you’re not losing money. Finally, you could increase your marketing efforts to drum up business.
Lastly, consider taking business financing to improve the financial position of the business or clear debts. For example, a working capital loan can help you settle urgent bills if you have cash flow issues.
Bottom Line
Financial disaster can strike when you least expect it. Still, if you ensure credit levels are not too high, plan for expansion, and cut down on wastage, you can improve your financial health long before you need to take emergency action.
Follow the link in the introduction section above for more information on financing options.
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