Raising Capital: When Is It A Good Idea For An SME?
As a small business, money is always at a premium. You quickly learn that cash flow is a meaningful measurement of success because when it gets tight, options quickly narrow.
Having sufficient working capital is important but being able to expand is beneficial too. Here we look at when it’s the right time to raise capital, and times when it’s possibly not.
Raising Funds For Working Capital
When the ongoing needs of the business – its networking capital – are getting tighter every month, it’s a bad sign. Negative working capital is a strong indication that the current operations are under considerable financial strain. After all, positive working capital is required to not only fund current operations but also to be utilised for future needs. When the business is sufficiently constrained, the company is continually limited in what it can attempt to do. If left unresolved, then there’ll come a point when the business begins to struggle to meet its financial obligations on time.
Raising Capital For Non-specific Needs
Just like an individual who wishes to take out a personal loan but hasn’t decided how the money will be spent, capital raised without a purpose creates problems. You should know exactly how much you need, and exactly what for.
Borrowing Funds For Prudent Business Expansion
Just like businesses that are founded with a business plan already prepared and studied ahead of time, capital raised with a purpose bodes well. It also looks far better when applying for finance from a lender too. For instance, the list of business financing options is considerable. However, some business financing has a higher approval rate than others due to potential higher risk factors. When a business has a detailed financial plan for a £20,000 business loan, breaking down how each pound will be used is essential.
When Not To Borrow Funds
Economic or business uncertainty are times when it might be wise to borrow funds while you can. This allows for greater flexibility ahead of potentially bumpy sales figures for the next few months. It’s especially true if money is always tight at the company, leaving little margin for error.
Conservative business owners may wish to preserve cash levels for future opportunities and avoid borrowing in tough times. However, when there’s little to “preserve,” then borrowing may be necessary to have sufficient liquidity. Ill-founded plans with baseless sales projections and inaccurate expenditures can lead to difficulties. When the management accounts for a special project are inaccurate, funding shouldn’t be sought until they’re fixed. Otherwise, not only will results be inferior, but the wrong lending amount will be sought. Both of these aspects won’t help a business. Specificity matters.
Borrowing funds for a business is often an excellent idea. Few companies grow successfully with insufficient money behind them, but ensuring your plans are cohesive first is essential.