The thought that choices accessible for medium-sized business owners fall to choices between traditional financing, factoring companies , or venture capital is the wrong way to take a look at funding medium-sized business efforts. Even though the business relies solely on debt financing to feed its capital needs, business owners should look at the financing options offered to them as a 'portfolio' of investment possibilities.
One size does not fit all-- two or three sizes don't fit all either.
Most of the Main Street businesses we discuss here will incite growth and fund working capital with borrowed money or cash flow. Fortunately, there are a good deal of options available. Sadly, many small business owners take a look at the possibilities as an either/or choice to be made. I think it makes sense to consider financing products that are appropriate to different conditions and how they might work together to help small business owners get the capital they need.
For instance, 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 other traditional loan is the very best and only answer to the financing needs of the local dry cleaner or restaurant. Yes, interest rates are lower on a traditional fixed-term loan, but how quickly a small business owner can get capital can be problematic with a term loan that takes weeks or months to fund if the small business owner needs the cash today.
And, the elephant in the room 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 agonizing for early or idea-phase startups. No history, no product, and no revenues usually mean no loan.
For a business owner who doesn't match the underwriting guidelines of a traditional lender, invoice factoring company products can serve to help establish credit while allowing the borrower to fill his or her short-term capital requirements. Alternative lenders have less stringent lending guidelines than does the local bank-- but that comes with higher interest rates. Due to higher interest rates, small business owners should look at repayment terms of a few months rather than a couple of years. Although alternative financing might be a highly effective tool when used properly, it can also be very costly if misused.
Many small business owners who do qualify for low-interest term loans still turn to alternative financing methods as a short-term bridge to a traditional term loan while they anticipate a traditional loan to be funded. If the business owner is seeking 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 immediate availability to capital offered by receivable factoring .
When reviewing the many funding choices readily available for small business owners, some of the questions that should be asked include:.
1. What is the range of terms readily available?
2. Are there any upfront costs?
3. What is the minimum credit score required in order to get the loan?
4. What exactly are the underwriting needs along with my credit score?
5. Exactly how fast can the loan be funded?
6. Will I need to have the cash now, or can I stand by?
7. Will I have the capacity to make regular and timely payments?
A small business owner should treat his or her credit score like a valuable asset. Sometimes short-term financial judgments have long-term consequences. As an example; a business owner that had a very good business concept but no collateral, no income, and no credit was annoyed and disturbed that lenders weren't fascinated by his idea and weren't falling all over themselves to give him money. He wasn't interested in 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 option available and the approach I suggested. Many extremely successful companies were started by an entrepreneur who bootstrapped his way to the top.
Exactly what's the most effective approach for your Main Street business? There are certainly a lot more than one or even a combo of many selections-- once size does not fit everything.