The key to unlocking financing opportunities for your business
Starting a business is a challenging journey, especially for first-time founders who often juggle multiple roles. Losing sight of the primary goal—profitability—is an easy trap to fall into. In the first one to three years of business, it’s common to report a loss or break-even on tax returns as companies focus on growing their brand. While this can result in little to no tax payments, it’s crucial for business owners to avoid the catch-22 mindset, intentionally breaking even, or overspending to avoid taxes. Without the advice of a financial advisor or a business background, this may seem like a cheap option, but it can ultimately hamper the long-term success of the business and its eligibility for secure financing.
Profitability is a key factor in gaining access to traditional forms of business lending, such as B. Small Business Administration (SBA) loans, lines of credit, or even personal loans for business purposes. A company must demonstrate the viability of its taxes or show that it can personally vouch for the loan. Banks and lenders will not keep income statements because they fluctuate.
A common misconception of many first-time founders is that venture capitalists only invest in their company because they have a good idea or have been in business and generating revenue for a while. Shows like Shark Tank, while entertaining, contribute to this false narrative. “Unfortunately, too many small businesses focus solely on sales without even knowing if they are profitable. No matter how great your idea is or how big your turnover is, if you’re not profitable, it doesn’t matter,” says Lori Williams of Business Simply Put LLC.
Here are five actionable steps to help you achieve profitability and increase your chances of getting financing for your business.
1. Lower expenses
As an entrepreneur, it can be difficult to let someone go, but if you can’t afford certain roles, it’s important to take on for now. Think about which jobs, freelancers, or subscriptions you can cut to reduce spending.
When it comes to vendors, negotiate prices by looking for lower prices. If your current provider can’t offer the same prices, it may be time to switch. Switching providers can be difficult at first, but can lead to greater profitability in the long run.
2. Increase sales
While it may seem like an obvious step, increasing sales is often overlooked when a business owner wears multiple hats in the early stages of their business. However, there are viable ways to increase sales. If you have a product-based business, you should consider reaching out to more wholesale accounts or listing your products on wholesale websites. Leveraging your network through LinkedIn and the contact list can also help you connect with potential clients or colleagues that you can introduce to the right people.
A proactive approach to increasing sales can be very effective, and email marketing and SMS are among the most cost-effective marketing tools. Creating strategic campaigns with discounts and valuable information can encourage consumers to buy from your business.
Finally, consider raising your prices. Founders often avoid raising prices or charging shipping costs for fear of losing customers. While that fear is understandable, not having healthy margins could be a major factor preventing a company from being profitable.
3. Look for reputable financial advice
Building a successful business requires sound financial management, but not every business owner can afford a full-time CFO. Fortunately, there are resources to help you navigate the financial side of your business.
The Small Business Development Center (SBDC) offers free advice from taxpayer-funded consultants. Other organizations such as SCORE and the Small Business Administration (SBA) offer similar services.
Sites like Upwork and Fiverr allow you to list job openings and view potential candidates for accountants and part-time financial advisors or remote CFOs. Before hiring someone, make sure you validate their experience by checking with past and current clients. Finding the right person or team that fits within your budget can help ensure the financial success of your business.
4. Plan ahead
Looking ahead and setting achievable goals is critical to ensuring your business meets its financial goals. This includes creating a plan for your income, financing and tax planning. “Ideally, you want to know how much debt you need next year so that you have enough net income this year to prove you can pay off the loan,” says Sebastian De Vivo, List Ventures.
Proper tax planning is essential for any business, and working closely with an accountant or tax advisor can ensure your business is taking advantage of all available deductions and demonstrating a healthy margin of profitability. “Clear communication of your business goals and long-term plans is key to getting tailored advice from your CPA and getting your finances on the right track from the start,” advises Julia Shumskaya, CPA.
5. Explore financing options
Research and explore all of the funding options available to you, including grants, friends and family, loans, and investors. Different financing options have different requirements and conditions, and it is crucial to consider what is best for the long-term success of your business.
If your business isn’t profitable yet, it’s still a good time to start building relationships with banks and credit unions, who can be helpful when you eventually apply for a loan. Ask questions about loan eligibility requirements and post when you’ve achieved success to keep them updated on your progress. Once you have achieved profitability and worked on the necessary lending requirements, you can go through the process more easily.
By taking these practical steps, companies can increase profitability, improve their chances of accessing finance, and achieve long-term success. This tax season and beyond, take the steps necessary to become profitable and secure the funding needed to take your business to the next level.
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