Before you apply for loans or pitch to investors, you need to be clear about how much you need and why. Use these tips to get clearer on your goals.
When we say, “Don’t shortchange yourself,” we mean it. Businesses need capital to grow, yet just 25% of women entrepreneurs seek funding, compared to 34% of men. When they do ask for funding, women ask for $35,000 less than men do, on average. Not only can that limit your growth in the immediate future, but it can affect you in the long term, too. Business growth improves business value, and that can set you up to receive more funding down the road.
If you’re ready to get growing, you can use these questions and insights to help you determine just how much money you’d like to ask for.
Keep in mind that there’s no magic number or equation. But there are considerations around what you want to spend on, how much that may cost, when you want to get started, and whether you’re in a position to ask for it right now.
Also use the worksheet How much money should you ask for? (PDF) to capture the details and do the math so you can make a well-informed choice.
What do I need the money for?
Homing in on why you want the money will help you figure out the amount you need and what type of loan to seek.
The first step? Make a wish list of improvements, whether it’s purchasing new equipment, hiring additional staff to meet increasing demand or open an additional location, or stocking extra inventory to hedge against supply chain problems.
This may sound basic but clarifying the purpose for the money will help you figure out not just the amount, but also how to present your goals to a would-be lender, banker, or investor.
When trying to choose what to spend on next, think about whether the choices will add value to your business. It may seem fun to get the latest tech gadget, for instance, but if it won’t save or make you more money than it costs, you may want to go for something more practical.
When do I want to get started?
Now think about the timing for each desired project or purchase: Is this something you want or need to do ASAP — or can it wait a bit? The timing can also affect the type of funding you seek.
For instance, funding new equipment or renting a new location is a large capital commitment that might be suited to a long-term business loan with repayment terms of 3 to 10 years. On the other hand, if you need to stock up on inventory quickly to prepare for a big order, a short-term business loan with repayment terms of 1 year or less might be more suitable.
If you haven’t calculated the value of your business recently, now is a good time. You’ll need a clear idea of what your business is currently worth in order to make a pitch to lenders or investors — and after recent upheavals, the number may be very different from what it was a year or two ago.
How much will it cost me?
Once you’ve clarified what you need the money for and when, you’re ready to move to the next step: naming your desired amount. There’s no one right answer for this, as the right amount to ask for depends on your business needs, credit history, and risk tolerance.
To make an educated ask, first do some research to get an estimate of how much your goals or improvements will cost you — at the time you plan to buy or make them. For example, if you want to buy a building but you aren’t ready to do so until next year, consider that the market could go up or down. (It’s good practice to build in some wiggle room; that way if prices go up drastically, you’re still on track.)
How much debt can I afford to take on?
There are a number of factors that can help you make this decision. For example:
- Your debt-to-income ratio (DTI). Use the accompanying worksheet (PDF) to determine your DTI, which will help show you how creditworthy you’ll appear to a lender. The DTI demonstrates whether you’ll likely be able to repay a loan, based on your projected income and expenses.
- Your credit scores. Your business credit rating affects the amount you can borrow and the interest rate, but so does your personal credit score, since you’re an entrepreneur.
- Your long-term business plan. If you haven’t fleshed out or re-calculated these goals recently, it’s a good idea to do so now. Create milestones with cash flow projections over the next three years, and think about future cash flow patterns, too. Some businesses take out as much as possible — only to find that it still isn’t enough to do what they’d planned because of a lag in deposits or market ups and downs.
- The cost and terms of borrowing. Take into account how long you need the money for and/or how quickly you can pay it back. A higher interest rate may be tolerable if you won’t be repaying it for long. This will also affect the total cost of the loan. Look at the interest rates of various loans and the total you will be paying back over time.
The benefits of seeking funding from an investor
If you choose the right investor, you may gain access to their network and expertise, which can help you in many ways now and in the future. This route may also allow you to pay back the funds more gradually over time, as you earn greater profits. (See Should you look for investors? for a detailed look at the pros and cons.)
You may want to enlist the help of some seasoned professionals to guide your estimates and consult a financial advisor if you need help comparing terms.
Remember: There’s no right answer when it comes to how much money a small business owner should ask for from a bank or investors. By taking some calculated steps and being more mindful of potential pitfalls, you can help ensure that you’ll request what you need to accomplish your goals.