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Small business funding: How much money should you ask for?

Small business funding: How much money should you ask for?
Charlie Gilbert
Charlie Gilbert
Content Manager
Enterprise Nation

Posted: Fri 29th Jan 2021

Nearly every founder of a new business experiences the same problem: with no reputation or revenue, how do you convince funders that your start-up is worth investing in or lending to?

Well, to start with, it's essential to ask for the right amount. Aim too high and you'll attract scepticism; too low and you'll be greeted with caution. How, then, to arrive at a figure that will be taken seriously while attracting real interest?

If you've written a thorough business plan, and drawn up equally thorough cashflow and profit forecasts, then you should have a clear idea of how much money you need to raise. In your business plan, remember to explain - in detail - how your idea is validated, and how you intend to use the money you raise.

After arriving at a figure, you may be tempted to speak to the bank manager - but there are two reasons why you should hold off rushing to book an appointment.

Reason #1: When it comes to funding, you have options

The bank shouldn't necessarily be seen as your go-to source of finance. Yes, you may have a relationship with them already. And yes, its offerings - either an overdraft or loan - are simple, competitive and, in the case of loans at least, flexible (at least until you want to pay it back early, in which case you may be charged).

For start-ups however, it's worth considering potentially strict upper limits for overdrafts, and the fact that banks can demand instant repayment. Some loans, meanwhile, may be secured (against things like your home). They may also have variable interest rates, which can make longer-term financial planning harder. Further, there's the issue of your bank being potentially unwilling to lend to your early-stage business.

Start Up Loans, by contrast, take the form of unsecured personal loans - 'unsecured' essentially meaning that you agree to make regular payments until the loan is paid back in full (if you're not able to make these payments, you may incur additional charges). They also have fixed interest rates of 6% and come with additional benefits like access to a mentor.

There are of course other options, each with their own pros and cons: loans or investment from friendly or family, crowdfunding, selling shares, taking partners, etc.

The takeaway here - if you're borrowing - is to shop around. A particularly efficient way to do this is by taking Funding Xchange's digital lending tool, which presents small business owners with appropriate funding solutions tailored to their circumstances.

If you're beyond the start-up stage, you're likely to be eligible for more options, which is why it's even more important to discover one that matches both your situation and onward projections - whether that's a secured or unsecured business loan, fast business cash, or merchant funding, to name but three.

Reason #2: You must take a second look at the amount you think you need

Arriving at a figure is one thing, scrutinising it through the critical eyes of a lender is another. Whichever funding route you do go down, you'll be made to show that you've done your homework. Will you be making enough to meet any repayments? Do you know your credit score, in case of any questions about your credit history? Do your figures really add up?

Detailed financial forecasts sometimes show that founders require less money than they anticipated, but it's also worth bearing in mind what would happen if your sales don't materialise to the extent you predicted. Going back to your lender and asking for more - if not part of your plan - won't inspire confidence, and your request may be rejected.

When arriving at an amount, then, be conservative - but not so conservative as to render your business plan unviable, and to cause you serious cash shortage problems further down the line. This exercise, in essence, is about taking a meticulously calculated risk - one that should pay off.

Three tips when deciding how much money to ask for:

  • If you proceed with a loan, determine how the amount you ask for will translate to monthly repayments, and how you'll be able to afford these alongside your other expenses

  • If your business is new, lenders will look at your credit rating. You may be able to improve yours - giving you a better chance of securing the amount you need - by building your credit history and making any payments you're already committed to on time

  • If your business has been trading for 12 months, create a three-year cashflow forecast. This will convince lenders that you'll be able to repay the amount you're asking for

Are you looking for funding for your start-up or small business? Try Funding Xchange's digital lending tool today and get presented with choices tailored to your circumstances.

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Charlie Gilbert
Charlie Gilbert
Content Manager
Enterprise Nation
I’m a content and communications strategist with a passion for brand storytelling. I also happen to be Enterprise Nation’s content manager – so if there’s anything you’d like to see more of, or you have a story to tell, please do connect!

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