Five Tips on Prepping for Business Financing

U.S. small business owners don’t have it easy getting their companies off the ground, especially when it comes to financing. One survey shows 56% of small business owners say they’ve face big cash flow issues within the first three years of launching their companies.

Business owners handle internal financial issues in their own unique way. TakeAdam Gorham, founder and creative director of Adam Gorham Films, who’s had his fair share of angst over funding issues.

“Here’s the thing about running a production company: my money doesn’t show up in neat little monthly deposits. It comes in lumps,” Gorham told SBG Funding. “One big project pays for everything, and then I’m sitting around for weeks waiting on a client check while payroll and gear rentals just keep tapping me on the shoulder.”

That push and pull has taught Gorham more about borrowing than any finance book ever did, and he has the battle scars to prove it. Here’s what leads his learning list.

Common mistakes when choosing the wrong funding option.

“The mistake I see over and over is people falling for a product before they even know what their problem is,” Gorham said. “They walk into the bank wanting “a loan” the same way someone walks into a camera store wanting “a camera” without ever asking what they’re actually trying to shoot.”

Taking out a term loan to cover a cash gap can be a big mistake. “You end up paying fixed interest for years on something that only stung for three weeks,” he noted. The same outcome can vex a business owner who buys a permanent asset on a line of credit. “Then, the founder never pays it down because nobody’s making them do so.”

Gorham said his business financing philosophy is simple. “Match the financial tool to the actual job, and not to whatever you’re feeling like getting,” he said.

1. Make timing a priority with business funding

Gorham also lives by the adage that if an expense is going to stick around a long time, finance it over a long time. If it’s short, keep the borrowing short.

“When I bought a camera package I knew I’d lean on for years, a term loan just made sense, fixed payment, a clear finish line, and the gear earning its keep the whole ride,” he noted. “But when I had to front production costs on a job that would pay out in 60 days? Line of credit, no question.”

The one-time Gorham got sloppy and put a short-term gap on long-term debt; he ended up paying interest for years on money he’d already gotten back in a month. “I learned that one the hard way,” he added.

2. Tend to growth and cash gaps early

Even if a growing business continues to increase its revenue (and therefore profitability), rapid growth may still create cash flow shortages.

“Growth increases demand for working capital; however, cash flow generation lags behind growth because of increased investment in inventory, payroll expansion, new equipment purchases, and longer payables by customers,” Joe Braier, CEO and president of Lake Country Advisors, told SBG.  

The end result is that income statements show high profitability, but liquidity becomes strained.

“Lenders and buyers look closely at how quickly a business’s revenues convert to cash,” Braier said. “Since the faster a business grows, the greater its need for working capital, this type of growth can put undue stress on a company’s operations even though it is financially successful.”

3. Lenders tend to appreciate early borrowers

Timing also sends lenders high-octane signals regarding a business’s stability and discipline.

“Businesses that apply for funding early tend to present clean financials and predictable cash flows,” Braier noted. “Therefore, these businesses are viewed as having a better chance for approval and larger lines of credit.”

However, if a business applies for funding after some form of financial decline, the lender will likely re-evaluate the level of risk involved. “This could ultimately limit the amount of funding a business receives, require tighter covenants, or make the loan more expensive,” Braier added. “By engaging in discussions with lenders early on, owners maintain more control over both the terms and conditions of the agreement, and have more leverage in negotiations.”

4. Lines of credit as an emergency vehicle are overrated

Many owners think of a business line of credit as emergency financing, but that could be the wrong call.

“Honestly, the best use cases are rarely emergencies,” Ethan Aiem, founder and CEO of Klendify, which works with business owners to secure SBA and private financing. “I’ve watched owners use credit to buy inventory ahead of big seasonal waves, snag supplier discounts by buying in bulk, smooth out hiccups between invoices and bills, or even hire ahead of a busy season instead of scrambling later.”

Aiem recalls a manufacturer that suddenly landed a huge contract, way bigger than anything it had handled before. “Demand wasn’t the challenge; it was capacity,” Aiem said. “Because they already had that credit line open, they jumped on it right away, bought materials, and got started.”

If they’d waited to get a loan after the contract, the window probably would’ve closed before the money landed. “Unfortunately, many people don’t believe a line of credit is just a safety net,” he added. “Sometimes it lets you move fast and grab opportunities you might otherwise miss.”

5. Get the cash flow/business financing conundrum right

If there’s one cash-flow habit that every business owner should embrace that would improve both their financial resilience and access to future financing, it’s knowing your cash rhythm. “That doesn’t just mean your monthly sales but also when the money actually shows up,” Aiem said.

Overall, know that cash flow keeps your business alive, and financing just gives you more breathing room.

“The strongest companies aren’t the ones that never borrow,” They’re the ones that never let urgency call the shots when it comes to money,” Aiem said.