How Much Funding of Your Business Should Come from External Sources?

How Much Funding of Your Business Should Come from External Sources?
How Much Funding of Your Business Should Come from External Sources?
October 1, 2016

The dire need for money is usually the baseline most businesses need to push their production to the next level of their existence. The craving for fund is a normal trend for businesses in their early years. Bigger businesses also require funds from time to time but theirs is usually to accelerate their process. Determining the amount of funds to be sourced externally is always a big challenge.

Financial need of the business needs to be carefully valued

Handling the financial need of a business is a delicate matter that the entrepreneur will need properly evaluate. Sourcing for too little fund will be as injurious to your business as sourcing for too much, although from different perspective as can be seen below:

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Raising too little fund can stall your business plans

If you have made a proposal for your business but only succeeded in raising part of the finance, what it means is that your business will run out of money deep into the business project. This may affect your reputation in the eyes of investors who may still be interested in your venture. Raising fund usually takes a lot of time and attention. So, your next shot may be far off, leaving your business in a limbo.

Too much fund will lead to wrong evaluation by investors

The higher evaluation your business gets in the eyes of an investor, the higher the expectation that will be placed on it. Getting more funding will mean more diligence and price to pay leading to undue pressure on your part. Also, the equity of an investor will increase (to your detriment) if you get a funding in excess of their evaluation.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

Too much money leads to extravagant spending

If you know you have little or just enough, you will be more frugal in your spending. This psychology automatically changes if you have more than you need. You may have the urge to hire more staff, have a bigger office and so on. In other words, the extra money is of not financially value to the business. Sadly, all borrowed money will have to be paid back someday.

Having excess can be of value if on terms

It is not always easy (and most times impossible because of volatility of prices and market forces) to get the exact financial prediction of a business. It is advised that you go for excess rather than under in fundraising if the terms will be fairly the same but be disciplined enough to make sure that the funds are channeled to where they are meant to be.

Read also: What You Never Knew about the Small Business Administration Loans

Every business needs to have a revenue assessment

Projections on the financial need of a business can be made by having an unbiased view of the current cash position, the monthly revenue and the milestone set for the business. The three key steps should be followed for business evaluation:

  1. Review your projections with milestone in mind to understand the financial need of your business in the next twenty four months.
  2. Add additional cost up to the point you think the business will become self-sustaining.
  3. Add a reasonable contingency fee in case anything should go wrong in your projection.

Justify every dollar you get from your investor

Investors will be at ease with you if you can give them a good account of their money. The prime concern of every investor is for the entrepreneur to maximize their investment for a maximal increment. As an entrepreneur, you will need to strike the balance. Inasmuch as you will not want to overburden your company with excess fund, running out of cash is not an option.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • New businesses always require high volume of funds.
  • The amount of funds that needs to come from external sources needs to be critically analyzed.
  • Too little funding will leave your business cash strapped.
  • Inaccurate sourcing of funds will affect your business reputation in the eyes of investors.
  • Excess funding may lead to reckless spending.
  • High expectations will lead to undue pressure.
  • It is better to have excess funding in a business.
  • Give room for contingencies when sourcing for loans.
  • Financial discipline is crucial in running a successful business.
  • Evaluating the revenue and setting milestones can help you determine how much your business need.

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