nullThe concept that choices readily available for medium-sized business owners fall to solutions between traditional financing, alternative financing , or venture capital is the wrong way to examine financing medium-sized business efforts. Even when the business depends solely on debt financing to sustain its capital requirements, business owners should examine the financing options readily available to them as a 'portfolio' of investment choices.
One size does not fit all-- two or three sizes don't fit all either.
Most of the Main Street businesses we talk about here will sustain growth and fund working capital with borrowed money or cash flow. The good news is, there are a ton of alternatives readily available. Sadly, many small business owners review the alternatives as an either/or choice to be made. I think it makes good sense to take a look at financing alternatives that are appropriate to different situations and how they might work together to help small business owners get the capital they need.
For example, a good relationship with a community banker is very important to the long-term health of a small business. That's not to say an SBA loan or some other traditional loan is the very best and only solution to the financing requirements of the local dry cleaner or restaurant. Yes, interest rates are lower on a traditional fixed-term loan, but how fast a small business owner can get access to capital might be challenging with a term loan that takes weeks or months to fund if the small business owner needs the cash now.
And, the major obstacle is that many Main Street business owners don't have the credit, time in business, or revenues to satisfy traditional loan criteria. This is particularly painful for early or idea-phase startups. No history, no product, and no revenues generally mean no loan.
For a business owner who doesn't meet the underwriting qualifications of a traditional lender, invoice factoring company products can serve to help establish credit while letting the borrower to fill his or her short-term capital needs. Alternative lenders have less rigid lending guidelines than does the local bank-- but that comes with higher interest rates. As a result of greater interest rates, small business owners should look at repayment terms of a few months instead of a couple of years. Although alternative financing might be a potent resource when used properly, it can also be very costly if misused.
Many small business owners who do get low-interest term loans still go to receivable factoring techniques as a short-term bridge to a traditional term loan while they await a traditional loan to be funded. If the business owner is attempting to take advantage of an opportunity and can't an SBA or other traditional loan to close, the additional interest they pay over the two or three months they wait is well worth almost instant availability to capital offered by receivable factoring .
When looking into the various financing selections offered for small business owners, several of the questions that should be asked include:.
1. What is the range of terms offered?
2. Are there any upfront costs?
3. What is the minimum credit score required to obtain the loan?
4. What are the underwriting guidelines besides my credit score?
5. How quickly can the loan be funded?
6. Do I really need the cash now, or can I sit tight?
7. Do I have the option to make regular and timely payments?
A small business owner should deal with his or her credit score like a precious asset. Sometimes short-term financial judgments have long-term repercussions. For example; a business owner that had a pretty good business idea but no collateral, no income, and no credit was frustrated and dismayed that lenders weren't curious about his idea and weren't gushing themselves to grant him money. He wasn't thinking about bootstrapping because it would cause him to lessen his growth plans. It wasn't what he wanted to hear, but bootstrapping his idea was the only real alternative available and the approach I suggested. Many incredibly successful companies were set up by an entrepreneur who bootstrapped his way to the top.
Just what's the most ideal strategy for your Main Street business? There are certainly more than just one and even a mix of many options-- once size does not fit all.