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Exploring Funding and Financing Opportunities for your Business? Do These 4 Things First

By Diane Amato

Published February 16, 2023 • 5 Min Read

Business has been anything but usual for years, and 2023 is shaping up to be another challenge. As you look towards the future and imagine what’s next for your business, you may find you need some external cash to move it forward. Before you apply for funding or credit, it’s important to be prepared — you need to make a strong case for your business to get the funding you need.

Here’s how to set yourself up for success.

Get your financials in order

While your company may be going strong and in good shape, can you say the same about your books? Whether you’re applying for grants, approaching investors or seeking credit, you need up-to-date financial statements and ratios to show your financial position.

Since the pandemic may have thrown a wrench in the trajectory of your business, it’s best to organize performance representing your pre-COVID, during-COVID, and current performance. A four-to-five-year window is helpful because your business may have performed quite differently throughout that period.

RatioWhat is it?How to calculate …
Current RatioAlso called Working Capital Ratio, this calculation indicates whether your business has enough cash flow to meet your short-term obligations, act on opportunities and look good in the eyes of potential lenders. It can also help you avoid cash flow problems before they surface.Divide your current assets by your current liabilities. Ideally, your Current Ratio should fall between 1.5 and 2 — a ratio of 1 means you may not have enough money to last the year, while a ratio of more than 2 could mean you’re not investing enough into your business for the future.
Debt RatioYour Debt Ratio shows the percentage of your business’ assets financed by creditors. It’s a ratio a lender will look at before lending money to your business, so it’s wise to know this number before planning the year ahead.Divide your total debt by your total assets. A good Debt Ratio largely depends on your industry, but anything below 0.3 is considered fair. With anything above 0.6, it may be harder to obtain additional loans.
Gross Profit MarginThis calculation shows you what percentage of your income is profit after paying for the cost of doing business. These costs include labour, materials and other production costs. While it can help you assess your company’s financial health, it’s best used to track your company’s performance over time or benchmark your business against companies in the same industry.Subtract your expenses/cost of goods sold from your net sales (gross revenues minus returns, allowances and discounts). Then, divide that number by your net revenues and multiply by 100% to calculate the gross profit margin ratio.

It’s also a smart idea to understand your credit score so you go into meetings equipped with all the necessary information.

Update your business plan

How is your business faring now that life has largely returned to normal and businesses and consumers have adopted relatively stable buying practices?

Creating or updating your business plan can help guide you through the next stages of your business, identify gaps, spot opportunities and create a roadmap for the years ahead.

Use RBC’s free Business Plan Builder to help you start or update your business plan. It guides you through a series of questions, providing resources and a framework for success. Your business plan can be completed in as little as 30 minutes, so download the document anytime.

Outline your growth strategy

This step is more important if you’re borrowing to grow. When you lay out your growth strategy in detail, you can determine if you’re accounting for all the costs associated with growth, understand how much your growth will cost you and how much money you need from external sources to achieve your objectives.

Keep in mind it costs money to borrow money. Whether you need to make principal plus interest payments or interest-only payments, you’ll need to service your debt out of your cash flow.

It’s worth doing some scenario planning to feel more confident you can afford to borrow for your growth. Make optimistic, realistic and worst-case assumptions about your costs and revenue over the near term. This will give you insights into your cash flow position under various circumstances.

Try RBC’s Cashflow Calculator to input different scenarios into your plan, or download the 12-Month Cash Flow Template.

Understand today’s economic environment

The economy hasn’t made it easy for business owners to thrive. Between decades-high inflation and rising interest rates, doing business has become expensive. As you look to borrow funds to support your business, consider the impact of rates on your payments. Should interest rates increase further, will you still be able to afford payments?

If it’s not obvious, take a moment to calculate your Debt Service Coverage Ratio (DSCR).

RatioWhat is it?How to calculate …
Debt Service Coverage Ratio (DSCR)This is a key measure of your ability to repay your loans, take on new financing and make dividend payments. Typically, the greater the value over 1.25 (125% coverage), the better.Divide your net operating income by your debt service, which is the sum of all current debts, including principal and interest. As you evaluate your DSCR, keep in mind your medium- and long-term cash flow projections – you’ll want to feel comfortable that your ratio can remain strong in the foreseeable future.

Once you’ve followed the steps above, you’re ready to explore the different vehicles available to help you fund your business. Whether you’re exploring government grants, outside investment or credit from a financial situation, having your financial house in order can give you — and your potential funding partners — the confidence needed to pursue the cash sources to help you succeed.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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