Business funding is vital for companies across all industries. It helps them get off the ground, finance day-to-day business operations, purchase assets, grab opportunities, and expand and succeed in the long term.
However, sourcing funds can be difficult. From looking for sources of funds to convincing them that your business idea is a solid investment, there are undoubtedly several challenges companies will face.
In this article, we’ll discuss five of the most common challenges companies experience when seeking business funding and solutions to overcome them.
Establishing A Scalable Business Model
Whether companies plan to expand their business with a loan or go for a round of venture capital, they need a scalable business model to attract investors. Without scalability, a business idea is likely not to be investable.
The problem is that many companies fail to communicate how they will scale their businesses effectively. The good news is that there are ways to avoid this challenge, such as the following:
- Examine each process in the business and scale smart by working “hands-on” only on core competencies. Avoid relying on competitors’ models.
- Outsource non-strategic business operations to minimize costs. One example of this is opting for automation rather than in-house labor.
- Determine and eliminate roadblocks to organizational growth.
- Strive for continuous business growth and make an open-ended strategy.
Note that a scalable business model should indicate the potential to increase revenue with minimal spending for the next few months or years. If companies face an extension of time, funds, and resources, stakeholders and investors will be less likely to open their gates.
Lack of Track Record and Market Validation
Despite having a scalable business model, many investors still hesitate to invest in ventures that lack market validation, particularly startups. They prefer established companies with a history of success and stable revenue.
Companies without a proven track record must find alternative ways to showcase their potential. These include doing market research, attaining early customer feedback, and writing a winning business plan, highlighting the business’s unique selling points and growth potential.
Limited Yet Competitive Financial Resources
Business funding resources are very limited yet competitive. Besides that, lenders and investors regularly receive numerous proposals and pitches from other companies. All of these make it challenging for startups and SMEs to stand out.
The solution is to explore all financing options, not only lenders or investors. For example, consider alternative lending, such as grants from the Small Business Administration (SBA). Then, when reaching out to lenders or investors, clearly articulate the business value proposition with a compelling elevator pitch alongside a comprehensive business plan.
Knowing the Exact Funds to Raise
Underfunding and overfunding are among the most common costly mistakes many businesses make. First, raising too little capital results in insufficient resources. In this case, companies usually have difficulty hiring and retaining workers and investing in new business equipment.
Second, it may sound great, but raising too much money can be problematic. In most cases, more isn’t always better. Typically, overfunding allows investors to exert intensive pressure on companies. As a result, business owners end up making uninformed business decisions hurriedly.
To determine the exact amount of funds to ask for, do the following steps:
- Write a business plan – It should include a realistic financial plan and projection. Forecast the expected cost a loan or investment will cover and the returns it’ll generate. Ensure to justify each figure, fact, and projected statistic.
- Set specific and concrete milestones – Lenders and investors expect to see how a company plans to spend funds for their business growth. However, planning for fancy equipment or unnecessary automation won’t please them. Instead, plan measurable achievements, such as aiming to launch a new product or reach a specific market share.
- Demonstrate positive cash flow – Healthy cash flow always increases the chances of obtaining desired funding. To help achieve this, create and follow a viable financial model where all costs are factored in and monitored, and a buffer is added accordingly.
The bottom line is that businesses must only ask for funding they need and can handle. Ideally, the amount should appropriately reflect a business’s financial circumstances with a little extra to act as a safety net in case of unexpected costs, delays, and emergencies.
Unfamiliarity with Fundamentals of Funding
Many businesses are unaware of the different funding options that vary depending on each phase of a business lifecycle. Some of these are as follows:
- Funding in the seed phase – for market research and product development to gain a degree of traction and attract additional investors;
- Additional finance during exponential business growth – to keep up with the demands;
- Venture capital financing – for mature businesses ready to strive for mergers, competitor acquisitions, or initial public offerings (IPO).
Most of these oblivious companies inappropriately approach lenders and investors at the wrong phase of their business development. It leads to a waste of resources and failure to seek funding.
That’s why being aware of the basics of funding is necessary. Learn and understand various rounds and available funds to help find the right financing solution for the business needs and situation.
Final Thoughts
Securing business funding is a critical challenge for most companies, especially startups. Thankfully, it’s possible to overcome them. With the right strategies and approach, they can surely obtain the funding their business needs for growth and success.
