Business Funding Readiness: A Financial Health Check for Small Business Owners

Are you ready to take your business funding readiness to the next level but unsure if your finances are in place to secure the capital you need? This health check will guide you through how to assess your current financial position and help you determine if you’re ready for capital. Get ready to review your balance sheet, financial projections, and key metrics that investors and lenders look for when evaluating applications.



Meet the Expert

Oren Shani

Oren Shani is a program manager and certified business coach with Accion Opportunity Fund. Oren has 10+ years of experience managing businesses and advising other business owners. He started, managed, and expanded his own business, providing disability accommodations for live events across the country. He now helps entrepreneurs launch and grow their own businesses.

Business Funding Readiness

One of the most most important, and challenging, steps in a business growth journey is securing funding for your business. Regardless of if you are seeking funding from loans, grants, investments, or other forms of capital, as a small business owner, you must ensure that your business is set up for application success. Being ready for capital means you: understand your financial health, your financial and business documents are organized and ready to share, and you have taken steps to increase your chances of successfully securing business funding. This financial health check walks you through the essential steps on the journey to financial readiness to apply for capital. Following these steps will make your business more attractive to lenders and investors.

Before you submit a loan or investment application, make sure you’ve researched and reviewed all of your financing options and have identified the right financing option for your business.

Assess Your Current Financial Position

Before applying for additional capital, you have to know where your business stands financially. Your balance sheet, cash flow statement, and profit and loss (P&L) statement are the financial documents that paint a picture of your business’ financial health.

• Balance Sheet: Shows your assets, liabilities, and equity. Your balance sheet is snapshot of what your business owns and owes.
• Cash Flow Statement: Highlights how cash moves in and out of your business. Your cash flow statement allows you to predict and understand the cash coming into your business (mostly from sales or capital like loans) and the cash flowing out of your business due to expenses.
• Profit and Loss Statement (P&L): Provides insight into your business’s revenue, expenses, and profitability over a specific period.

By carefully analyzing these key financial documents, you can determine if your business is financially ready to seek funding. If, through your financial documents, you are able to show that your business finances are strong, stable, and predictable, you’re more likely to be successful in your capital readiness assessment. Potential investors or lenders will expect to see these statements when evaluating your loan readiness or investment readiness.

How to Prepare for Raising Capital

Once you have a clear picture of your financial health, it’s time to prepare your business for to apply for funding. Investors and lenders will calculate specific financial metrics and ratios that demonstrate your business’s ability to handle debt and generate profits. Remember, their main concern is your ability to either repay your loan or get a return on their investment.

Some of the key metrics they look at include:

• Debt Service Coverage Ratio (DSCR): This measures how well your business can cover its debt payments. Lenders generally look for a DSCR between 1.2 and 1.5 to ensure your business can handle additional debt. You can calculate your DSCR by dividing your monthly net income by your monthly debt obligations: DSCR = Monthly Net Income / Monthly Debt Obligations
  • Monthly Net Income = Monthly Revenue – Fixed Monthly Expenses
  • Monthly Debt Obligations= Total of all Monthly Debt Payments
• Profit Margins: Investors will assess your profit margins to see if your business is financially viable and sustainable. Are you consistently making enough profit to cover all of your expenses, pay an owner salary, and more to be able to afford loan payments or investor returns?

In addition to understanding these metrics, successful applications should have a clear plan for how the funding will be used to improve the business’ bottom line.

You’ll also need to prepare documentation that lenders and investors require, including:

• Tax Returns and Bank Statements: Lenders often require at least two to three years of tax returns and bank statements to show the stability of the business’ income and expenses.
• Realistic Financial Projections: Projections should be based on historic data (if possible), competitor research, and market research, and demonstrate how you plan to grow the business and generate returns.

Use these documents to show your capital readiness and funding preparedness to potential lenders or investors. Prove that you are ready for capital and that you’ve thought through how you will use it.

Actionable Steps for Future Business Funding

There are several steps you can take to improve your business’s financial standing and increase its appeal to funders. The best way to prepare to apply for capital will be different, depending on who you are approaching, lenders or investors:

• Lenders: Will focus on the 5 C’s of credit: Character, Capacity, Capital, Collateral, and Conditions. These factors help lenders assess your creditworthiness and ability to repay a loan.
• Investors: Will focus on your financial performance, profitability, and growth potential. Investors are look for businesses that can provide a good return on their investment. You will likely need to pitch your business to an investor. Learn more about how to pitch your business in this short course.

There are several actions you can take to improve your business’s financial readiness:

• Implement a reliable and consistent accounting system and ensure that your bookkeeping is accurate and up to date. An accurate accounting system will give you a clear picture of your business’ financial health through financial metrics like your business’s revenue, expenses, and cash flow.
• Evaluate your financial records to ensure they’re correct and reflect the current state of your business. Your finances tell a story about your business the same way your brand or your social media does. Make sure you understand your financial story and are able to share it with potential investors or lenders.
• Regularly update your financial projections based on the latest data and market conditions. This is especially important for investors.
• Strengthen your financial reporting to improve your investment readiness and loan readiness. The clearer and more accurate your financial documents are, the more confident potential funders will be in your business.

Pro Tip:

Use a Capital Readiness Assessment to gauge how prepared your business is for funding. This can help you identify any gaps in your financial records or business operations before approaching lenders or investors. Short courses like Access to Capital can help you understand the access to capital process and get you ready to apply for capital.

Monitor Your Financial Performance

Once you’ve assessed and improved your financial standing, it is critical that you regularly monitor your financial performance. Consistent financial review helps you stay on top of any issues that could affect your ability to secure funding in the future.

• Monitor Cash Flow: Cash flow management is critical for maintaining the flexibility to handle any unexpected expenses or downturns. Actuve cash flow management also ensures you can pay all of your expenses on time, every time.
• Conduct Market Research: Regularly compare your financial performance with industry benchmarks to ensure that your business remains competitive. This will also give you insights into how to raise funds for a business start-up or expansion.

Maintaining a close watch on your finances helps ensure that you’re always ready for investment or a loan application when opportunities or needs arise.

Improve Your Financial Planning

Investors and lenders want to see that you have a robust plan that addresses potential risks and demonstrates a clear path to growth. To secure business funding, you also need to have a detailed plan for how you will use the investment or loan funds to improve your business.

How to improve your financial planning create a detailed business plan:

• Start with the basics: Craft a plan that includes financial projections, cash flow analysis, and a clear explanation of how the funding will be used to grow the business.
• Customize your plan for your audience:  A business plan for potential investors should recap the history of your business, your wins, and the challenges you’ve overcome, along with your plans for the future, backed by historic data and well researched projections. If a potential lender is looking at a business plan, they’ll have some of the same concerns, but might be more focused on financial metrics like your Debt Service Coverage Ratio.
• Set realistic goals: Establish financial milestones for your business, such as revenue targets, profit margins, and debt reduction plans. Detail how you plan to reach your goals is one way to demonstrate your business and financial readiness.

Consider seeking professional advice from accountants or financial advisors to ensure that your financial plan is accurate and meets the expectations of funders.

Business Funding Readiness Check

By following these steps and focusing on your business funding readiness, you will be well-prepared to apply for loans or investment for your business. Whether you’re exploring how to fund a new business or how to fund a business expansion, having a strong financial foundation will give you a competitive edge. As you build out your investment readiness strategy, remember that securing business funding is not just about numbers—it’s about demonstrating that you have a plan for long-term success.

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