Questions to Help Determine Outside Financing Needs
Your business plan will provide a roadmap for operating your new business, but it also provides important information to lenders and potential investors. As you develop the financial projections for your business plan, there are several questions to ask that can help determine the amount of outside financing that will be necessary for your business to be successful.
1. Do you need more capital for day-to-day management of your business during early phases? Do your financial projections indicate you may have difficulty managing cash flow to meet ordinary obligations on time, as you get your business off the ground? If your best financial estimates indicate you will have difficulty cash flowing operations in the first year, you will likely need an infusion of capital for launch. Be sure this need is detailed in your business plan, including explanation of all assumptions.
2. What are your other capital needs? If your business plan includes expansion, how will that expansion be funded? What about managing risk? Both these situations may spell the need for outside funding. If an expansion is written into your plan before your business is able to finance the costs, you will likely need an infusion of capital to make it happen. Or, maybe your financials show your company can meet day-to-day operations and business goals, but there is not an acceptable cushion to protect against risk. It is usually easier to secure funding at start-up than when a business is facing a crisis. All businesses carry some degree of risk, but the amount of risk for your particular business will affect both available funding and the cost of your loan.
3. Are your needs for funding driven by seasonal or cyclical factors? Funding to meet seasonal needs are typically short-term and met through smaller loans with quicker maturation. If your industry is cyclical, you may need to seek funding to get your business through slower periods, which should be be detailed in your business plan. Your cash flow is also likely to remain erratic and your financial projections—as well as your needs for funding—should reflect this.
While your response to these questions will help ensure needs for outside funding are detailed in your business plan, it isn’t enough to work a few line items into your financial projections. Your lender or potential outside investor will want to know specifics of how you intend to use the money. As you put together those projections, be sure you are able to explain any assumptions that go into your projected uses of outside capital and provide specific breakdowns of how the funding will be used.
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