Four tips for raising business capital

While most businesses in need of funding would simply approach a bank with a loan application, the process of securing the right kind of funding for your business requires the investment of a little more time and effort. Small business owners can sometimes make the mistake of rushing into first-time or additional finance without doing their research, particularly when the need is an urgent.

However, there are a number of questions to ask before making the first approach, including the purpose the finance will serve, what assets could be used as security, the state of the business owner's credit report and whether alternative funding sources may better suit the business.

Determine the purpose of the finance

This should be the first question asked once a business has made the decision to access new credit, as it will largely determine the type of finance to be pursued. For instance, a business may require fast access to funds to provide short term working capital or for long-term strategic investment.

Decide the type of finance you are seeking

In the case of short-term working capital, certain types of funding are inappropriate - such as a fully drawn advance for example. For funds that will be used to support operational costs, an overdraft facility with an agreed limit on an existing loan would be a better option as an overdraft is intended to be paid down relatively quickly. Therefore, this suits short-term needs such as paying staff wages within a particular month, that are likely to be repaid the following month.

Likewise, a line of credit can provide a quick and easy means for withdrawing funds to meet business overhead during a gap in cash flow. Unlike an overdraft, which will not necessarily require security, a line of credit or equity financing option will require some form of security, such as a property mortgage. This generally means a lower interest rate however it can also render the secured asset vulnerable should the business be unable to make repayments.

For long-term capital investment purchases aimed at expanding the business in preparation for future growth, a fully drawn advance is an upfront loan that will also be secured by a major asset. 

The government's business website also has a Business Loan Finder  to help small businesses determine the most appropriate loan. 

Prepare for the credit assessment process

Of course before approaching a lender, good preparation will ensure there are no unpleasant surprises during the credit assessment process. The first step is to be aware of how the credit history of either the business or individual may impact this process. For smaller businesses in particular, understanding a personal credit history will be key to understand credit eligibility. Unincorporated entities, whose commercial and personal histories are one and the same, can obtain a copy of their personal credit report for free here.

This should form part of a wider business plan, which will include the type of finance required, what finance will be used for, overview of current operations, general industry information, previous financials (specifically the last 5 years' net profit) and an outline of projected performance. 

The process of putting a plan together can also help you obtain a clearer picture of where the business is at, areas that may need improvement and what the objectives are for the future. Once you have a solid plan in place, the next phrase should be to research lenders. Your current financial provider may not necessarily provide the best options, have a look at what is out there and compare interest rates, terms and conditions.

Look at non-commercial options

There are also options outside of traditional loan sources that small businesses can neglect to explore, such as venture capitalist firms or angel investors that may invest in the growth of a business if they recognise growth potential in a business. Investors will often assist higher risk businesses to grow in the early stages and will own a portion of the business during this time.

See also: Five things to consider before applying for a loan

Connect with us to receive updates throughout the day:

Like us on Facebok Follow us on Twitter

Dun and Bradstreet AustraliaTop of page Dun & Bradstreet Australia Pty Ltd 2015 | D&B Small Business    *About Us    *Sitemap    *Advertise    *Privacy    *Terms & Conditions