7 Signs Your Business Needs Funding (With Action Steps)

Most businesses need additional funding at some point within their lifecycle. Whether it's a bank loan, angel investors, grants, family and friends, venture capitalists, or other sources, it's crucial for a business to always maintain a positive cash flow. But how do you know when it's the right time to seek funding?

After working with hundreds of startups, there are clear signs we've discovered to help you understand when your business needs financing. Check out these 7 signs — and the action steps to go with them.

1. You have untapped sales.

Do you ever get instances where your available inventory doesn't meet demand? Does it take a long time for your sales department to complete orders? Do you often end up with unfulfilled orders? If this describes your business, you probably need to seek funding to finance the shortfalls.

If you lose a customer due to stock shortfalls or an inability to complete a service, the chances are they won't return. A hassle-free fulfillment process enhances customer satisfaction, boosts the rate of return buyers, and attracts more clients through word-of-mouth — essentially growing your revenue.

Action step: Invest additional capital in creating better systems to facilitate order fulfillment. Funding is crucial here because acquiring a new client is more expensive than retaining an existing one.

2. You need to fulfill a contract.

Your business might sometimes receive a unique contract not in line with your day-to-day operations. For example, say you just opened a t-shirt company with a maximum daily capacity of printing 50 shirts. Company X orders 2,000 printed shirts with a two-week turnaround. Even running at full capacity, you'd only deliver 1,000 shirts — and you'd also delay other orders.

Action step: Instead of missing out on the opportunity, seek funding immediately. The capital can be used to sub-contract another business or increase capacity by hiring part-time employees and leasing more equipment. Get a properly defined contract with the client, then approach a bank about contract financing — where the bank gives you a cash advance on work you're yet to complete.

3. Your business is paying high-interest debt.

When starting out, an expensive loan may have been the only available financing option. Early-stage businesses are often considered high-risk, leading to high-interest debt that strains your financials long-term.

Action step: Establish your business credit and refinance the debt to acquire a lower interest rate. You could also borrow from a cheaper source to repay the costly debt. Doing this improves your business's overall financial health, making it more attractive to future equity investors and debt financiers.

4. You need to invest in technology and better systems.

Have an internal audit with your team to determine whether they have up-to-date tools to work efficiently. If upgrades are needed but financing isn't available, external funding can help. Investing in new equipment can offset multiple costs and give your business a competitive advantage.

Action step: Only pursue this once you have a well-defined, fully functional business model. Avoid taking on loans when you're not confident the returns will cover the additional costs. Also consider leasing versus purchasing options and find the structure that best suits your business financially and strategically.

5. There is an acquisition opportunity.

If a product line or a company with complementary offerings is up for sale but your business can't afford the acquisition, external financing may be the answer. Acquisitions and mergers can help growing businesses attain a strategic market position, increase economies of scale, gain a competitive edge, and access new markets, resources, and talent.

Action step: Hire a knowledgeable consultant or sub-contract a consulting company to advise on the legalities and processes. Complete a thorough analysis to evaluate a more accurate return on investment (ROI) before moving forward with any acquisition.

6. You have a delay in accounts payable.

Are you late on fulfilling your accounts payable? This can damage relationships with vendors, suppliers, and core partners — and can quickly escalate into a legal issue. A slow season or temporary closure doesn't mean you can ignore what's due.

Action step: Seek external financing to alleviate the pressure and give your business time to recover. This can help you revert to normal operations without burning critical business relationships.

7. You have a labor shortage.

When your current team doesn't have the necessary skills to perform specific tasks, or the number of tasks exceeds the time available to complete them, you have a labor shortage. The only real solution is hiring — but the hiring process can be expensive and may not have been budgeted for.

Action step: Seek external funding to cover your hiring needs. Before doing so, determine the ROI of each additional employee — annual wages and benefits should be justified by the returns the employee will bring. Also evaluate whether you truly have a staffing shortage or whether current employees are underperforming.

Businesses without financing sources flounder. Having capital available at the right time is vital to keeping momentum. We hope this guide helps you determine when to seek financing — bookmark it for future reference.

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