The idea that choices available for medium-sized business owners fall to selections between traditional financing, factoring companies , or venture capital is the wrong way to consider financing medium-sized business initiatives. Even when the business relies solely on debt financing to feed its capital needs, business owners should take a look at the financing options accessible 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 discuss here will incite growth and fund working capital with borrowed money or cash flow. Fortunately, there are a plenty of possibilities available. Sadly, many small business owners take a look at the alternatives as an either/or choice to be made. I think it makes good sense to examine financing solutions that are appropriate to different conditions and how they might work together to help small business owners discover the capital they need.
As an example, a good relationship with a community banker is crucial to the long-term health of a small business. That’s not to say an SBA loan or some other traditional loan is the most ideal 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 access to capital could be challenging with a term loan that takes weeks or months to fund if the small business owner needs the cash immediately.
And, the big hurdle is that many Main Street business owners don’t have the credit, time in business, or revenues to satisfy traditional loan requirements. This is even more so distressing for early or idea-phase startups. No history, no product, and no revenues normally mean no loan.
For a business owner who doesn’t meet the underwriting requirements of a traditional lender, alternative loan products can serve to help establish credit while enabling the borrower to fill his or her short-term capital needs. Alternative lenders have less stringent lending guidelines than does the local bank– but that comes with higher interest rates. As a result of higher interest rates, small business owners should consider repayment terms of a few months as opposed to a couple of years. Although alternative financing can possibly be a powerful tool when used the right way, it can also be very costly if misused.
Many small business owners who do get low-interest term loans still resort receivable factoring methods as a short-term bridge to a traditional term loan while they anticipate a traditional loan to become funded. If the business owner is attempting to take advantage of an opportunity and can’t expect 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 access to capital offered by factoring companies .
When taking a look at the many financing choices readily available for small business owners, some 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 needed to get the loan?
4. Exactly what are the underwriting criteria along with my credit score?
5. Exactly how quickly can the loan be funded?
6. Do I need the cash now, or can I delay?
7. Will I have the option to make regular and prompt payments?
A small business owner should treat his or her credit score like a valuable asset. In some cases short-term financial judgments have long-term consequences. As an example; a business owner that had a pretty good business concept but no collateral, no income, and no credit was annoyed and dismayed that lenders weren’t curious about his idea and weren’t falling all over themselves to offer him money. He wasn’t interested in bootstrapping because it would cause him to scale back his growth plans. It wasn’t what he would like to hear, but bootstrapping his idea was the only real choice available and the approach I suggested. Many unbelievably successful companies were set up by an entrepreneur who bootstrapped his way to the top.
What’s the very best strategy for your Main Street business? There are certainly a lot more than one and even a combination of many possibilities– once size does not fit everything.