When my co-founders and I decided we were going to start Yoco in 2013 we knew that funding the business would be a challenge. But we didn’t quite realise what a monumental challenge it would actually be. I’ve learnt so much over the past four years and am glad I have to the opportunity to share it with other entrepreneurs. However, before we get to the ‘hows’ of sourcing capital I want you to make absolutely sure that your business really does need to source funding. Note that advice here is specific to businesses that are already up and running. Sourcing start-up capital is an entirely different ball game.
Ask yourself some hard questions first
Sit down and critically evaluate your business. Remember that you will ultimately need to give something back for that funding, be it a part of your business or extra money on top of what you’ve loaned. How much is the extra funding worth to you? What would happen to your business if you couldn’t get it? Ultimately, you need to be sure that this cash injection will help you achieve what you want to do.
Start with your goals
Grab a piece of paper and write down your short-term and your long-term goals. The type of funding you need and how you prove you need it are dependent on these goals. Are you currently on track to achieving your goals? If not, what stumbling blocks or pain points are keeping you away from your goals?
Evaluate your financial pain points
Which of the obstacles standing between you and your goals, can be solved with extra money? Probably most of them. However, taking out a loan or selling equity may not be the answer. Entrepreneurs often use financing to temporarily plug holes in their businesses instead of fixing the hole. This means that in the long run the business still has a hole and now has extra debt.
Let’s take a look at examples of short term and long term financial needs.
Short-term financial needs
Short-term finance is the cash on hand that you need to keep your business running on a daily, weekly or monthly basis. While profit is an important indicator of business health, it does not always correlate with having money in the bank. Below are examples of situations where you may need extra cash on hand in the short term and how to approach the situation.
Scenario #1: I need funding to purchase inventory.
This need could arise before a big season, for example, the December holiday period, and you need to buy stock in bulk. As peak seasons often come after a slow season, you may not have enough available cash to finance this purchase. If you find yourself in this situation, funding from sources external to your business could be the right move. However, before looking for financing from a financial institution such as a bank, discuss the possibility of extended payment terms with your suppliers.
Keep tabs on your business cycle and make sure that you have enough cash on hand to cater for an increase in inventory needs. Should you find yourself facing unplanned, frequent inventory financing needs, examine your business model deeply by scrutinising your costs and pricing. Finally, look for ways to shorten your collection cycles, for example:
- Collect payments from your customers by card instead of waiting for an EFT.
- Enlist the help of inventory-management software such as Xero or Vend, both of which integrate seamlessly with Yoco.
Related Article: Master your small business cash flow
Scenario #2: I need funding to hire more employees.
Hiring more staff is necessary for any growing business. However, there are two key things to bear in mind: 1) Hiring requires you to invest funds upfront before the additional revenues are realised, 2) employees are a fixed cost to your business. This means that unlike inventory, the implications are long-term and the investment is fairly high risk.
Ask yourself the following:
- Have you done what you can to optimise your operation before seeking funds to hire new employees?
- Is your need for additional staff temporary or permanent?
- How long would it take for your profits from the new sales to start covering the salaries of your newly hired employees?
- Have you budgeted for a scenario of slower growth, which could add strain to your finances and your ability to pay back said financing?
Scenario #3: I need funding to launch a marketing campaign.
The viability of this type of funding boils down to how well you can forecast the growth that a marketing campaign will drive (your return on investment). Some campaigns are more predictable and offer more control. For example, most online marketing channels – such as Facebook or Google Adwords – offer you the opportunity to run experiments, get quick feedback and quickly increase or decrease budget as you see fit. Conversely, TV, radio and print campaigns are great for mass awareness but leave you with very little control.
Before you go down the route of seeking funding for marketing spend, ask yourself if you’ve considered other ways to drive sales that that won’t cost as much. Are you getting the most out of your loyal customers? Are you doing your best to win back customers who you’ve lost ? Have you tried engaging your customers on social media, email marketing or referral marketing? All of these methods are viable, powerful and cost-effective.
Long-term financial needs
This type of funding takes longer than six months to pay back. Long-term funding is usually part of a strategic plan to grow your business in the mid- to long-term or to make your business more efficient.
Scenario #1: I need funding to expand into new markets or locations.
If your business is going well, you may have identified an opportunity to expand into a new location. As is often the case, your current cash flow may not be sufficient to cover all aspects of that investment, for example, the down payment, shop fittings, extra stock or the initial running costs. This is a substantial and long-term investment.
The first step is to evaluate what the potential return on investment for this expansion will be and compare it to other opportunities. If you’re confident that this is the next move, ask yourself if there is anything you can do that will lower the cost of the expansion. For example:
- Have you considered franchising that new location to someone who may compliment you well and take on some of that cash burden?
- If you are a product-based business, you could generate extra income by selling through distributors or other retailers.
Related: Selling on consignment.
Scenario #2: I need funding to invest in an asset for my business.
Before taking out a loan or bringing an investor into your business, evaluate if the asset you want to purchase will bring clear strategic benefits that can be realised through increased revenue, decreased costs, or a better customer experience.
You may be currently using an outsourced delivery partner and want to purchase your own delivery truck to shorten delivery times and provide a more personalised experience. Alternatively, you may want to move away from using an outsourced warehousing partner and build your own warehouse. These might decrease your costs in the long run but will require substantial upfront investment. In addition, there will almost always be a learning curve as you take on these new operational responsibilities. Evaluate if the strategic benefits – such as long-term efficiencies and increased control – will outweigh the mid-term cash flow risks.
The bottom line
Funding is not something that should be taken lightly. Many businesses go under because they cannot repay their loans and end up blacklisted. Once that happens they are cut off from many opportunities and have a very low chance of bringing investors onboard. Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide more capital is necessary to reach your goals, and you’re willing to take on the responsibility, take a look at our Yoco Capital page.
Yoco Capital is a low-risk cash advance offer for selected Yoco Merchants. Your capital offer is based on your Yoco account history. You automatically pay back your cash advance as a percentage of your daily Yoco card sales. The more you swipe, the faster you pay back your cash advance. It’s that simple. All you have to worry about is getting on with business as usual.