For a lot of business owners, the idea of getting external funding can feel like a big deal. It’s often linked to quick growth, trustworthiness and long-term success, and that’s something to shout about. However, raising external funding at the wrong time can put too much pressure on a business. You run the risk of giving up too much ownership before you’re ready, and slowing down progress instead of speeding it up.
Before you start the process of sourcing external funding, you need to consider if you’re really ready and which approach is best for your business plans.
The Benefits of Securing Funding from Outside Sources
When used correctly, external funding can be hugely beneficial, opening up doors that your business would otherwise struggle to open.
Speedy Growth
Speed is one of the key benefits of raising external funding. When you have the funding, you can hire important team members sooner rather than later, invest a lot more into sales and marketing, and get started on branching out into new markets or geographical areas. You’ll even have the cash to build the next stage of your infrastructure, so it’s ready when you need it. This speed can be the difference between being a market leader, and falling behind.
Skills, Experience and Industry Connections
Raising external funding means working with investors, and the right investors bring more than just money to your business. They can provide strategic advice based on industry experience, even helping you to navigate hiring senior staff or finding solutions to scaling problems. Investors are also a good way to be introduced to potential business partners, clients or future investors, who you may not have met otherwise.
Business Credibility and Trust
Being able to secure external funding is a good sign, and it reflects positively on your business as a whole. It tells customers, suppliers and the wider market that your business has been approved by investors, you have people supporting your growth and experts believe you have what it takes to succeed.
Take Bigger Risks
Regardless of the industry you’re in, you have to take risks as a business owner. This isn’t easy when your cash reserves are dwindling and you don’t have much to fall back on. When you have more money saved up, you can take bigger risks. You can try out new ideas, enter new markets or invest in new technologies, without worrying about running out of money straight away.
Are There Any Downsides to Raising External Funding?
Despite the benefits, there are a handful of downsides that come with external funding, and it’s important to consider these before you take the next step.
Losing Control
If you go down the equity funding route, you will have to give up part of your business. If you’re a business owner that’s used to being in control, this isn’t always easy. You might need to give voting rights and seats on the board to investors, meaning you’re not the only one with the power to make big decisions.
Pressure to Make Profits
Investors want to see business growth, and they tend to want it to happen within a certain amount of time. This can change the way you approach growth, often meaning that you need to prioritise speedy scaling over long-term plans. You might need to find a balance between short-term goals and long-term stability, rather than just focusing on one.
More Responsibility
When people have invested in your business, they want to be kept in the loop. This means you’ll need to send updates and reports on a regular basis, meet agreed upon goals and explain the choices you’re making.
Signs You Might Be Ready to Raise External Funding
If you’re thinking about raising external funding, you need to be confident that you’re ready to take that step, and that you’re doing so at the perfect time for your business.
Your Product and Market Work Together
You need to make sure your product or service, and your market, work well together. Things like
consistent sales, a growing customer base, loyal customers, good reviews and referrals are all proof that the demand is there. If you’re still working on your offer, external funding could make existing problems worse, rather than fixing them.
You Understand Your Numbers
Before you ask someone to invest, make sure you understand your numbers. You need to know all your sources of income, profit margins, customer acquisition costs (CAC), customer lifetime value (LTV) and changes in cash flow. Investors want things to be clear, and they want confidence that you know how to handle your business’ finances.
You’re Struggling to Keep Up with Demand
Sending customers away, having trouble fulfilling orders and struggling to grow delivery or operations are all signs that you might need to grow, and your business is therefore ready for funding. With external funding, you’ll find it easier to take advantage of opportunities and keep things moving forward.
You Have a Clear Plan for Growth
If you want people to fund your business, you need to be able to say how the money will be used, how it will help the business to grow, what returns people can expect and how long it’ll be before you see results. Investors want to see a clear link between the money they’re parting with, and what they will get in return.
You’re Ready for the Change
Running a business with money at your disposal and investors to answer to, is very different to running one where you’re counting every penny, but you’re doing so alone. Make sure that you’re ready for the change mentally. You’re going to have to deal with external input, investor questions, pressure to do well and reporting requirements. If your top priority is complete independence, you might not be ready to raise external funding.
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For a lot of business owners, the idea of getting external funding can feel like a big deal. It’s often linked to quick growth, trustworthiness and long-term success, and that’s something to shout about. However, raising external funding at the wrong time can put too much pressure on a business. You run the risk of giving up too much ownership before you’re ready, and slowing down progress instead of speeding it up.
Before you start the process of sourcing external funding, you need to consider if you’re really ready and which approach is best for your business plans.
