The ups and downs of the economy can hit small businesses extremely hard. Take, for example, financing a new business endeavor. Even if a company has a couple years experience under its belt, getting the necessary finances gets even more difficult (something that was never that easy to do even in the best of times).
Different companies may require different levels of funding, which may limit their options even further. As a small business, a lot of the traditional routes may seem closed off or inaccessible, especially when the economy is in a slump. This is when banks start to get very tight about making loans, and even a short history of consistent revenue may not be enough to convince them of your general worthiness.
Lenders have to be careful with how they provide funding. Our recent history shows how they can get burned pretty badly when they aren’t. Too many businesses failed without ever paying back the money, and this led to even more economic problems. The risks of dealing with companies that don’t have a well-established history just became too large, and so they became extra selective in how they dealt with applicants.
There are, however, a lot of alternatives for small businesses who have a strong, if short, history. Consider a few of these funding channels as a potential way to start growing your company and develop your product or service offerings.
Business Credit Cards
A business credit card is a simple way for a business to finance smaller purchases without having to go through all the red tape with traditional lenders. While they may have a variable interest rate, if payments are made on time your payments don’t have to get out of control. On top of that, they are a great way for businesses to keep track of their spending for their records and buy supplies without waiting for lender approval.
However, the real downside to using a card is that there are credit limits which can make certain purchases difficult. To put it bluntly, you’re not going to purchase a vehicle or other large pieces of equipment with a card. You can definitely do some helpful things with a credit card, like purchasing supplies or paying for mechanical repairs, but you will certainly not be able to purchase your company car.
It’s also worth noting that some business credit cards provide discounts and rewards of one type or another. While this certainly wouldn’t count as “financing” of any sort, it is a benefit that the frugal-minded can put to good use.
Merchant Cash Advances
A Merchant Cash Advance (MCA) is becoming a popular option for many small businesses that cannot secure funding through traditional lenders. There are certain conditions that have to be met to acquire this kind of funding, but even businesses with a just few years experience can be approved even without a personal guarantee or any liens or collateral.
An MCA works differently from traditional funding. In this case, the provider purchases a specific amount of the business’s future credit card receivables in one lump sum. In other words, the business receives a certain amount of money from the provider, which is then paid back in the form of a daily percentage of daily credit/debit card totals.
One of the main benefits here is that companies with slower, seasonal sales won’t have the same detrimental impact on the business. If sales are reduced, the company is not expected to continue making the exact same payment every month. Instead, the company makes a payment more in line with the current cash flow. This leaves them with more of their own funds every month to continue growing their business.
Business Lines of Credit
Much like a checking account, a line of credit allows you to have money at your disposal. However, instead of being like a traditional loan, where the entire amount is rewarded at one time and monthly payments made, you only repay on what you withdraw.
This is a very common way for businesses to function financially because it can really help when unexpected expenses hit. No matter how much a company manages its risks, there are usually a few surprise expenses along the way that the normal budget just won’t cover. With a business line of credit, the money is available to you when you need to use it because the full amount is already approved.
Sometimes, a company needs a significant level of funding, and maybe even a strategic partner, to really expand the business. In these cases, an angel investor may be the best option for you. This is a good option for businesses that are still in the early stages of growth, and the investors can get a good return on their investment, too.
Businesses that have gotten past the startup phase and can show that they are able to produce some consistent revenue, can turn to venture capitalists for more funding to reach the next stage of growth. Companies can potential get millions of dollars that can then be put back into the business, so you can expect some a serious inspection of your business before receiving any funding this way.
Venture capitalists also tend to stick to the industries they know, which means that they can provide more than just money. They also often provide management experience and business consultations to ensure that their investment becomes profitable.
If you are looking for another avenue for funding your business and its ventures, any of the above options are effective financial tools that many companies have used. These alternatives may be more successful than simply going to a bank and asking for a small loan, and for many businesses, these may be the only options they have in a downed economy. Don't let a bank kick you when you're down, just find another way to get your business where it needs to be.