The idea that choices readily available for medium-sized business owners come down to selections between traditional financing, invoice factoring companies , or venture capital is the wrong way to take a look at funding small business initiatives. Even though the business depends only on debt financing to fuel its capital requirements, 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. The good news is, there are a good deal of possibilities accessible. Unfortunately, many small business owners review the options as an either/or choice to be made. I think it makes good sense to check out financing products that are appropriate to different scenarios and how they might work together to help small business owners find the capital they need.
Such as, 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 effective and only answer to the financing demands 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 problematic with a term loan that takes weeks or months to fund if the small business owner needs to have the cash now.
And, the big hurdle is that many Main Street business owners don't have the credit, time in business, or revenues to comply with traditional loan requirements. This is especially distressing for early or idea-phase startups. No history, no product, and no revenues generally mean no loan.
For a business owner who doesn't fit the underwriting qualifications of a traditional lender, invoice factoring company products can really help establish credit while allowing the borrower to fill his or her short-term capital demands. Factoring companies 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 instead of a couple of years. Although receivable financing can possibly be a potent tool when used correctly, it can also be very costly if misused.
Many small business owners who do qualify for low-interest term loans still turn to invoice factoring techniques 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 wait for an SBA or other traditional loan to close, the added interest they pay over the two or three months they wait is well worth almost instant accessibility to capital offered by factoring companies .
When taking a look at the various funding alternatives available for small business owners, a few 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 required to get the loan?
4. What exactly are the underwriting needs besides my credit score?
5. How promptly can the loan be funded?
6. Will I need to have the cash now, or can I sit tight?
7. Will 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 decisions have long-term outcomes. As an example; a business owner that had a pretty good business concept but no collateral, no income, and no credit was distressed and angry that lenders weren't interested in his idea and weren't gushing themselves to grant him money. He wasn't interested in bootstrapping because it would cause him to scale back his growth plans. It wasn't what he wanted 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 most effective strategy for your Main Street business? There are certainly a lot more than one or even a mixture of many options-- once size does not fit all.