The thought that options available for small business owners come down to selections between traditional financing, invoice factoring companies , or venture capital is the wrong way to look at funding small business initiatives. Even if the business depends only on debt financing to fuel its capital demands, 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 mention here will fuel growth and fund working capital with borrowed money or cash flow. Fortunately, there are a good deal of possibilities available. Unfortunately, many small business owners examine the selections as an either/or choice to be made. I think it makes sense to take a look at financing options that are appropriate to different situations and how they might work together to help small business owners discover 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 requirements 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 could be problematic with a term loan that takes weeks or months to fund if the small business owner needs the cash today.
And, the major obstacle is that many Main Street business owners don't have the credit, time in business, or revenues to meet traditional loan requirements. This is especially painful for early or idea-phase startups. No history, no product, and no revenues usually mean no loan.
For a business owner who doesn't meet the underwriting demands of a traditional lender, alternative loan products can help establish credit while letting the borrower to fill his or her short-term capital needs. Factoring companies have less stringent lending demands than does the local bank-- but that comes with higher interest rates. Because of greater interest rates, small business owners should review repayment terms of a few months instead of a couple of years. Although receivable financing can be a highly effective tool when used correctly, it can also be very costly if misused.
Many small business owners who do get low-interest term loans still turn to factoring company options as a short-term bridge to a traditional term loan while they wait for a traditional loan to become funded. If the business owner is trying to take advantage of an opportunity and can't wait for 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 access to capital offered by alternative financing .
When examining the various financing choices offered for small business owners, some of the questions that should be asked include:.
1. What is the range of terms available?
2. Are there any upfront costs?
3. What is the minimum credit score needed in order to get the loan?
4. What exactly are the underwriting requirements in addition to my credit score?
5. How rapidly can the loan be funded?
6. Will I really need the cash now, or can I sit tight?
7. Do I have the capacity to make regular and timely payments?
A small business owner should manage his or her credit score like a priceless asset. At times short-term financial decisions have long-term consequences. For example; a business owner that had a pretty good business concept but no collateral, no income, and no credit was annoyed and disturbed that lenders weren't interested in his idea and weren't falling all over themselves to give him money. He wasn't thinking about bootstrapping because it would cause him to lessen his growth plans. It wasn't what he wished to hear, but bootstrapping his idea was the only real choice available and the approach I suggested. Many incredibly successful companies were started by an entrepreneur who bootstrapped his way to the top.
What's the most ideal technique for your Main Street business? There are certainly more than just one and even a mixture of many options-- once size does not fit all.