14 Nov 5 Funding lessons for entrepreneurs
Many entrepreneurs may see taking on debt as negative but when you understand it better, debt isn’t a bad thing or necessarily a last resort, but rather an opportunity to grow, and it’s cheaper than equity in terms of funding. There are different types of debt funding options and sources of capital available and it’s important to make the right decision on which funding partner to choose.
In the spirit of Global Entrepreneurship Week, here are 5 lessons entrepreneurs may need to learn to get the most out of funding their business.
1) Banks don’t need to be your first (or only) option
Gone are the days of bank representatives and relationship managers visiting a business to assess it for a loan. What won’t disappear, however, is the value of having a funding partner who understands a business and wants to help it grow, not just meet a monthly repayment. While the funding landscape may have changed with more options available, having financial support and operational input can make a big difference to a business. Entrepreneurs typically have smaller teams and may not have an unbiased sounding board available – but working with a funding partner who can provide both capital and clarity on ideas on how to deploy funding can mean a better result from the deal overall.
The Lesson: Find a funding partner that is willing to work with you, not just provide capital.
2) A credit check is your first hurdle
If you want to become financially fit with a business to match, there are certain things you need to action. Once a financier or lender looks at a poor credit history, it doesn’t bode well for a positive outcome and can tarnish your reputation over the long term. So do your own credit checks, such as through Clearscore.com or ITC to check your score before considering funding. You need to be candid in the process of applying for funding as ultimately a funder’s decision is based on trust. Not only do you need your management accounts, financial statements, and forecasts to be ready, you need to own up to it when something is not good in the books.
The Lesson: If you’ve had a financial indiscretion in the past, it will come out at some point, be it by mistake or through Google or social media, and if you haven’t been honest about it, no one will ever lend to you. So, get your credit checks done and always be transparent.
3) Cheap funding isn’t always the best – consider your options
Keeping costs down is a natural step for entrepreneurs but taking on cheap funding can cost more in the end. It’s therefore prudent to make a funding decision not only based on the service fee or rate, but also on the value of the offering. The funding and service from a partner that works alongside an entrepreneur may come at a premium. It’s also worth having more than one funding partner. Entrepreneurs with all their debt facilities at a single bank may discover that the bank changes its attitude over time and its approach to providing facilities along with it, putting your access to debt at risk.
The Lesson: Spreading your risk by including non-bank lenders who care about your business (and may have a service fee to match) is likely to be a better course of action than sticking with one credit option simply because it’s cheaper.
4) Find the balance between debt and equity
Invariably, you’ve got entrepreneurs who want as much debt as possible because it’s generally cheaper than giving away equity. But while at first glance it’s cheaper, it’s crucial to consider the fine print and note that the lender is also essentially investing in the business and has a vested interest in seeing it thrive. With interest rates ticking up, so does the cost of debt, so it’s important to understand any penalties if you miss payments and the conditions of what you are signing before you do so.
The Lesson: Taking on debt and signing a personal suretyship comes with risk and reward – be sure to read the fine print upfront.
5) The right funding requires review
Once debt has been part of a business for some time, it’s good to review any restructuring options or if alternative products are better for the next step in your funding journey. If you took on debt in a hurry, circumstances may have improved, and you might be able to get better terms. Some debt, for example from a non-bank lender shouldn’t be seen as a long-term facility because it will be too costly to maintain over time.
The Lesson: In the case of existing funding, you need to check if you’ve still got the right facility. Consider a specialist review – you might be paying too much or can find a better solution for your business, now that it is more established. For example, with non-bank lending facilities beyond ten years, the exit strategy is important to know before you are committed. Otherwise, an entrepreneur can get caught in an expensive deal with little way out.
Thinking beyond traditional financing is key to growing your business over time. Sometimes having to learn the hard way may be part of the entrepreneurial journey but you don’t need to follow in the footsteps of entrepreneurs who have made financing mistakes – follow the lessons above for the best business funding – and growth story.