Securing business financing before you need it is an important proactive measure that can make all the difference in keeping your business afloat. Although it may not seem necessary at first, there are several key benefits to obtaining financing ahead of time.
First and foremost, it helps to ensure that the funds are available when you need them most. When an unexpected expense or shortfall occurs, having access to capital can help you cover the cost and keep your business running smoothly. Additionally, when financing is secured in advance, it allows you to make better decisions than if you attempted to secure financing under pressure.
Unexpected expenses can be the undoing of even the most well-managed businesses. Studies show that up to 72% of small businesses fail within the first five years, and many of those closures are due to unanticipated costs. Having the necessary funds for unexpected expenses can be a make-or-break proposition for a small business.
Even the most thorough and organized financial plan can come under strain if sales slow suddenly, taxes are higher than anticipated, cost of supplies increase, repairs are needed after a physical or natural disaster, or you need to deal with a theft or data breach. Having a financial cushion to fall back on in the event of an unexpected expense can help reduce the risk of going into debt or bankruptcy.
Easier Approval in Good Times
Applying for capital when your company is still in good financial standing can significantly increase the chances of being approved for funding. Good credit scores, steady income and a healthy savings account can all be factors that lenders consider when evaluating your application. Having these factors in place can make it easier to get approved for funding as you may be seen as less of a risk to the lender.
If businesses wait until they need money to apply for a loan or line of credit, they may find it difficult to get the working capital they need due to their current financial issues. For example, lenders often require businesses to have a certain amount of available cash flow or collateral in order to qualify for a line of credit. If a business is already struggling financially, they may not be able to meet these requirements.
Opening a line of credit when business is booming can be a great way to secure capital for unexpected expenses or future investments.A line of credit provides businesses with access to a predetermined amount of funds that can be utilized at their discretion, allowing them to take advantage of opportunities as they arise.
Putting plans in place when times are good can provide businesses with a safety net for when times are tough.
Favorable Market Conditions
Applying for funding before it’s needed also gives borrowers the opportunity to take advantage of any favorable market conditions, such as low-interest rates or attractive terms and conditions. This means that borrowers can secure the most favorable loan terms before they need to use the money.
Applying for financing in advance also allows borrowers to consider their payment plan and budget appropriately as they will have a better understanding of what they are able to pay back each month, based on the loan amount, interest rate and repayment period offered by the lender.
Prospective borrowers have access to a wider range of loan options, and having the time to conduct proper research allows them to make an informed decision about which lender best suits their needs.
Without an immediate need for financing, lenders are more likely to provide loans as they can review applications in greater detail, thereby reducing the risk of lending. This often means that lenders may be willing to offer lower interest rates or longer repayment terms than those available to borrowers in more urgent situations.
Peace of Mind
Not only is it much easier to get approved when times are good, but it also provides peace of mind knowing that you have access to funds if needed.
It’s no surprise that when life presents an emergency, it threatens your financial well-being and causes stress. If you’re living without a safety net, you’re living on the financial edge and hoping to get by without running into a crisis. Being prepared gives you confidence that you can tackle any of life’s unexpected events without adding money worries to your list.
Having the capital already in place can also keep you from making bad financial decisions. Applying for funds urgently or under duress can be detrimental. When a business is rushed into making decisions, they are often unable to take the necessary time to research and evaluate potential grants or loans that may have lower interest rates or better repayment terms. Being short on capital, and the added pressure of having to decide quickly, can lead to poor financial decisions and have serious consequences in the long run.
When the entire nation is facing the same problem, it can be extremely difficult for individuals to secure funds with such a high demand from other people in similar circumstances. This creates a situation where those who need funding must compete with each other, leading to an increased difficulty in acquiring financial assistance. Furthermore, it puts an immense strain on government resources, as they are struggling to meet the needs of everyone who is seeking aid. For situations such as these, it’s important to already have the capital you need.
For all of the mentioned reasons, securing business financing before it is needed is a wise financial move that can have far-reaching positive implications for businesses. A solid business plan will give you direction and help you manage your capital. When you have a good understanding of your business direction, it’s time to calculate how much funding you need. Knowing your runway, the total funds available against the amount of cash you spend per month, will tell you how many months you have to raise capital and deliver on your business plan. You now have time to do your research, decide on the right option, and go all in on getting funding.
Securing funding before it’s needed is a great way to prepare for any potential future challenges and uncertainties. By having the necessary financial resources in place, a business can be equipped to face whatever opportunities or obstacles may arise.