Very few of us start a business with a million dollars in the bank. Therefore, finding financing solutions to grow your small business is important. It does not matter if you are just starting out or if you have been in business for years. You need cash to grow your business.
Traditional SMB financing options, such as banks and the Small Business Administration (SBA), have become harder to approach in recent years. Since 2006, small business loans from the biggest banks in the country have fallen by 38%. Last year the SBA literally ran out of money for their most popular program. The good news is that there are more options than ever. If you are a small business owner, you should know about all of them.
Internet banks have been around since the 1990’s, but online lenders have become a popular destination for millions of small businesses throughout the country. One advantage online lenders have is speed. Many can process your loan in just a few days. At a conference last year, former Treasury Secretary Larry Summers announced that he expects online lenders eventually to account for more than 70% of all small business loans.
While these lenders are growing fast, they are also becoming increasingly tied to banks. In 2014, J.P. Morgan announced an agreement to partner with OnDeck. This agreement is significant since it means that online lenders are beginning to act more like the banks they are trying to disrupt. Some business owners can attest to this change because many online lenders have raised their credit scores or minimum revenue requirements.
Factoring has been around for years. But it was traditionally used by large businesses to reduce risk and to speed up their cash cycles. What has changed is that a number of firms are now offering factoring and invoice advances to small businesses.
While these services have benefit, factoring can be expensive. Its cost depends on the credit-worthiness of the billed customer. As such, factoring is not always the best choice for a small business, especially B2C (business to consumer) businesses.
Presales can be a low-cost way to pay for your new product. But presale success depends on a number of factors. First, you need a relatively large and extremely patient customer base. Second, your product must be compelling enough that your customers will be willing to pay now and then wait. Third, you must have a way to reach those customers now.
If you meet these requirements, then great. Presales is a great way to get the money you need now. Just make sure you use the money to build and deliver the product you promised. If you don’t, your reputation will be permanently tarnished.
Don’t look at presales as a way of getting free money, even though you are getting money from your customers in advance. A well-tuned presale company requires careful planning. Whether or not presales is successful ultimately comes down to the timing of your campaign and the story you tell.
Another solution to growing your small business is alternative financing. While many alternative financing firms have an online presence, their programs are more flexible than those of online lenders. These programs can include working capital loans, equipment loans, inventory loans, lines of credit, and even merchant cash advance solutions. In many cases, such firms will tailor a solution to meet your needs.
While these loans are still called “alternative,” they have become mainstream. For example, San Diego-based Mulligan Funding has provided more than $100 million in financing to thousands of businesses throughout the country. As you can see, the only thing “alternative” about these companies is that they provide faster, more flexible SMB financing.
Other SMB Financing Options
The options listed above are just a few of the choices you have. You could also choose from high-risk alternatives such as friends and family, credit cards, and home equity loans. However, there are significant downsides to these choices, mainly because it is best to separate the financing of your business and your personal expenses.
Another possibility is to seek an equity partner. This is generally a long-term process – in some cases two years or longer. While angel or venture capital investors play an important role in a number of businesses, they also expect a return. And in some cases, they can even vote you out of your own company if you don’t meet certain expectations.
In the end, it is best to grow your business by means of one of the safe options listed above. Once you get big enough, you won’t need to look for investors. They will come looking for you.
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