When to secure funding for your business

In today's blog post, you will learn when to secure funding for your business. Regardless of what funding option you choose, be it an angel investor, friends and family round, VC capital, debt financing, choosing when and not the how is actually more important.

Often, it's a lot easier to get funding if you time your funding at the right time. It can be detrimental for you if you actually go out and get funding too early in the process. I'm gonna share with you today, when it is the best time for you to go out and get funding, not only in terms of getting the maximum amount of funding that you can get, but also good timing for you and your business.

Let’s start with the first question: When is a good time for you to start seeking out financial support for your business?

The process of getting funding for your business can be distracting and it can be very time consuming.

Finding and attracting the funding will take a lot of effort. And it could be well worth it, but if it's not timed right, it could be detrimental to the business. So we are going to discuss how to know it’s the right time for your business in today's episode.

A lot of new entrepreneurs think, I’ve got a great business idea if I can only get funding for it, then it's going to take off.

This is a very inexperienced point of view. This is just not how business works in reality. When anybody invests in a business, they're investing in either or both of the following things.

1. The business itself

2. The business owner

If the investor is investing in the actual business itself, meaning you have to have an established business with a proven track record of sales and revenue.

They need to know, is this business worth investing in? Does this actually have legs? Do people actually want what you're selling? If so, they're investing in that business.

The investor could decide to invest in the business because of the entrepreneur themselves. They believe in that business owner, that they have the capabilities and the track record to pull off the business idea.

For most new entrepreneurs, you will not get funded based on this criteria or based on this idea because you don't have a track record, because you don't have credibility. If you’re a second time founder following a successful first business then you’re likely to secure funding based on your history and experience.

Now I mentioned earlier a few different types of funding in this episode.

You might get angel investment. You might ask your friends and family, which is called the friends and family round. This is where you approach people and ask, would you like to contribute £5,000 each for the sake of the company?

Most kinds of investment results in you having to give up some equity in the business, which is typical in business funding, then you're gonna need to sell your business and its future by pitching the business to whoever is going to invest, whether it's friends and family, whether it's a VC or even an angel investor.

The easiest way to pitch to these investors is with data because numbers don't line. If the numbers are in your favour, it's gonna get easier and easier for you to get money.

This is why the number one rule is, don’t seek out funding until you have enough data to prove to the person you're asking for money. Your whole aim is to get the potential investor in a head space where they think, the data shows this is a no-brainer. It has to be a no-brainer for the investors, this will make your life a little bit easier because it's hard to ask for money.

It gets almost impossible when you have very little data to back it up. When I say data, I mean information, stats that show your business works. This means sales, this means revenue, this means profitability, this means run rate.

The perfect position to be in is where you've proven that you have a customer base, where you have a good number of customers that have bought from you, and your profit margins allow you to be profitable. That's a really good place to be. The minimum should be making revenue in the region of £50,000 to £100,000 a year when looking for funding, this will make your job easier.

If you're not making £50,000 to £100,000 a year on your business in terms of revenue yet, and you're not profitable, then keep going. Keep growing your business on your own, using your own financing with your own savings as much as possible. Get the formula right, before searching out funding to scale your business. I know that some businesses require funding earlier on because it's gonna be really hard for you to do that.

But in today's day and age, in the online world, most businesses can get started and can continue to grow based on side hustles and savings. The point here is that you're not really making enough sales and enough revenue to prove you have really tapped into the market.

Anything above this volume of revenue then you’re on an easy path. If you went to an investor and say, I made £150,000 in sales last year, in my first year of my business, I'm profitable, the business is running, this is what my customers say about the product, then it’s so much easier for you to get a yes. Opposed to, I haven't launched, I don't have any customers, I don't know what the customers think about my product yet because they haven't bought it yet.

Or even something in the middle, where you make a few thousand in sales in a year. As significant as that might be for you as you're starting out your business, that doesn't really sound like a business that people want to invest in where they're going to get a return. You should be able to make a few thousand without much effort really, but no one's investing because, there's not really a lot of return on that investment.

Let’s touch on debt financing, this is a little bit different because basically it's like a loan and it's based on your performance right now and the cash flow that you are getting. In a nutshell, what the bank cares about is they're just going to get their cash back with interest. If you're running a business with a reoccurring subscription or payment, this makes it a little bit easier to get funding because you have more of a predictable revenue.

Most debt financing options you need at least £100,000 to £150,000 in revenue to get started. Similar to this is like getting a bank loan from the bank. They're going to need some sales numbers, they're going to need some revenue numbers to prove it's worth them lending out £50,000 for you to grow your business, for example, because you've made already £50,000 to £100,000 in your business.

When it comes to funding not only do you need to know your numbers but you also need to know why you need the money and the reasons why the funds will further there business and grow it. You want to be in a position of power, a position of dominance, where you know that when you get this money, you know exactly what you're going to do with it, you know how it's going to improve your business, you know how that investment's going to really double your revenue, for example. This demonstrates to the funding option that you know when you will be in a position to pay back that loan or pay back investors or give them a return on that investment and make it worth their while. I've seen a lot of pitches by a lot of startups over the years, and I would say probably, only in one out of six pitches, I would want to have a conversation with the founder about supporting their venture.

Many people think that they can get investment for a business idea because it's just simply a good thing. That it’s aspirational. And it really could be.

However, in order for something to actually work, it has to be sustainable. It has to actually survive in the business world and if it doesn't have a business model that proves that, then it's basically wasting money in an investors eyes.

It's great that you're passionate about your business, but you’ve got to make sure the business of it works so that it's a no-brainer for people to invest.

Got a burning question? Reach out on our social channels or email me at michael@purpleyak.co.uk

Thank you so much for reading.

Take care.