Most businesses think that business finance is something you need when your business is short on cash or times are tough. Many companies seek corporate financing when business is not going well. The time to get business financing isn’t when your business is doing poorly or you’re short on cash.
When your business is doing well, there’s no better time to get started and get business financing. Why?
1) It’s easier to qualify
2) You can get better rates and terms 3) It’s easier to On Page SEO grow your earnings with an injection of capital 4) It’s easy to use the simple formulas we have here to scale your growth.
DON’T WAIT FOR THINGS TO GET BAD; WHEN YOU’RE WELL, CORPORATE FINANCE CAN SCALE YOUR BUSINESS TO THE NEXT LEVEL.
Here’s how to determine if business financing can help your business grow. There are 5 simple steps that will show you the value of business financing.
Step 1: What do you need to grow your business?
While this may sound like a silly question, it is a very important question.
The FIRST STEP you need to take is to determine what your business needs to increase sales. Most businesses require one or more of the following?
- Inventory and additional products
• Expansion of existing product line • Adding additional services • Marketing and advertising • Sales force or personnel • Machinery, equipment, software or hardware • Expansion into other areas or adding another location
Step 2: How much money do you need to achieve this?
How much money does it take to achieve that? Another simple question and it may sound silly. But you have to start with basic questions.
How much do you want to invest in your business or how much do you need to grow your business?
$10,000, $20,000, $40,000, $50,000, $100,000+
Step 3: Where are they from?
There are only three types of cash that flow into a business:
INCOME FROM SALES
INVESTMENT DOLLAR DEBT: A LOAN OR LOANS
Where will the money come from to grow your business?
If you have an existing business and want to invest in your business, either sell more or have large closing balances and enough reserves to invest again. If you plan to sell more ; Most sales and marketing strategies require some form of cash injection. If not, On Page SEO you are left with two options: an investor or a loan.
Step 4: When you have the amount of money you need to do what you want in your business – there are two key questions: When you know the answers to these two basic questions; You will immediately know how to increase your sales quickly.
1. How much money will you make with this money?
Financially – What is the ROI (Return on Investment)?
2. In what timeframe will you get the money back?
In what timeframe will you achieve the expected or projected ROI (return on investment)?
EXAMPLE (CASE STUDY): (Simple Version)
If someone gave you $100,000 what would you do and how would it affect your business?
I (YOUR NAME) would take $100,000 and put that money into marketing and augmentation. (NEED AND WANT)
I (YOUR NAME) would take $100,000 and make a 50% return in 5 months. The equivalent of 10% return per month…
With this information you are clear about how you would use the money, what kind of return you would get and in what time frame.
The next step; is to determine if you can?
- Grow sales to $100,000 and have the extra money to do it.
- If you got an investor, how much would they want? Most investors will either charge you between 10% and 30% interest or 20% to 50% of net profits. You need to calculate the cost of capital versus your rate of return.
- If you get a loan, the interest rate can range from 7% to 30%. You need to consider the cost of capital versus your rate of return.
EXAMPLE (CASE STUDY) – Crunchy Numbers:
For existing and operational companies
Food Distributors of America currently generates an average of $50,000 per month. At the end of the month, they close $5,000 in positive territory, which is about 10% net. Currently the inventory cost is $20,000. That means they buy $20,000 every month to gross out $50,000. The question you need to ask yourself is: What is my cost to generate a gross return? Once you know that, you know how much it takes to increase gross income by 10%, 30%, or even 100%. In this example, we can increase profits by 100% by making a capital injection of $20,000.
We know that $20,000 generates $50,000 a month. We know that $20,000 and $50,000 gross generate $5,000 net per month; that’s 10%. They want more inventory because they have potential buyers.
- An additional $20,000 would generate an additional $50,000 in gross sales; Increase in revenue to $100,000. This is a 100% increase in gross sales.
- An additional $20,000 would generate an additional $5,000 in net margins; Increase in income by another 10% monthly = 20% monthly.
- If this company could do this every single month, it would increase net profit by 10% x 12 months = 120%.
Not all companies can do this. Even if you increase your net income by 2% per month = 24% increase in 1 year.
Companies that carry inventory have an easier time achieving this.
shops that sell every day; such as restaurants, hair salons and anyone selling consumer goods; find it easier to achieve this.
Seasonal transactions can also achieve such returns.
Step 5: Calculate the cost of capital versus the return on investment (ROI).
If you don’t have the extra money; You need an investor or some kind of business financing or loan.
There is nothing wrong with taking on investors or a loan. Most successful companies have grown through the injection of capital. Think of this way. Would the New York Stock Exchange or the Chicago Board of Trade exist if companies didn’t have investors or take on debt? All companies on major stock and debt exchanges have investors or debt.
How do you calculate ROI and cost of capital? As easy as 1, 2. 3.
Let’s say you can get a $50,000 loan to invest in your business. You assume that over the next 5 months you will achieve a 5% return per month = 25% return. Let’s say you get a loan at 12% APR = equal to 1% per month.
5% per month (your rate of return) minus 1% = 4% Your new rate of return
4% x 5 months = 20% (after cost of capital)