As Funding Falls, Financing Options Flow

Leandro Mortenegro

Jennifer Palmer, CEO, eCapital Asset-Based Lending, Helping Companies – Especially Women-Owned – Thrive with Financing and Partnership

While large corporations often grab headlines, small businesses are the backbone of our economy and account for two-thirds of new jobs. But entrepreneurial companies contribute more than just employment. Young companies spark innovation and creativity and are the lifeblood of advancement in many industries. These businesses require capital to grow; however, reports indicate that fewer than one-third of their owners who went for traditional financing over the last year received what they wanted. This is backed up by recent Federal Reserve Bank research showing declines in funding from before the pandemic. How do young companies start or grow their business amid funding decreases? Here are some impactful strategies and potential pitfalls to avoid.

Friends And Family

Many entrepreneurs seeking quick access to capital begin by tapping their network of family and friends. Often this group may be more willing to fuel your dreams with fast cash and few strings attached. However, the adage that nothing comes for free still applies. Small businesses may wind up with many unsolicited advisors or those expecting some form of repayment. When taking money—even from close family members—make sure to have everything in writing and vetted by attorneys to ensure that the gift they gave comes with no surprises. You will want to replace early investors with institutional lenders as your business grows. The friends and family scenario can be a nightmare for institutional lenders if there are numerous funders, the company is structured with unrealistic terms, and the investments are undocumented.

Small Business Administration

Young companies can benefit from Small Business Administration (SBA) loans. These payments are partially guaranteed by the U.S. Small Business Administration but issued by certain lenders, usually banks. These loans have low interest rates and generally have longer terms to repay. Many entrepreneurs report that it takes a long time to be approved and requires a personal guarantee from the business partners owning a certain percentage or more of the business. This type of guarantee means that if the company cannot repay the loan—individuals are personally on the hook for the money.

Business Credit Cards

As consumers, many of us grow up with the ease of charging today and paying tomorrow. Credit cards offer businesses the advantages of paying for items quickly and paying them off over time. Charging expenses can solve and bridge cash needs from equipment to office supplies yet come with incredibly high interest rates. Credit cards allow companies to build up credit but should be used carefully to not rack up expensive fees. Remember, these are business credit cards for business purposes only, and personal expenses should remain on a separate card. The danger of mixing personal and business expenses extends beyond accounting confusion. Businesses can lose creditability with institutional lenders who may have a window into your spending that you would rather avoid sharing.

Alternative Financing

Many alternative lenders are available to businesses that not only provide needed funds but may provide valuable business advice and insights to help grow the company. And unlike many venture capital firms, the finance partners do not necessarily take equity in the company. These financing options can provide quick access to funds to fuel growth, acquisitions or expansion into new markets. Also, many of these loans come with limited restrictions on how you use the cash, which can provide greater flexibility to fuel your needs. Choosing any financial partner requires due diligence, and alternative financing is no exception. Make sure that the firm has a proven track record and works as a partner with a focus on your long-term growth and success, providing not just funds but financial counseling support. Also, note that alternative funders may charge higher interest rates than banks and have shorter repayment terms.

The days of money quickly and easily flowing to businesses are slowing and—sometimes—grinding to a halt. Companies seeking startup or expansion funds find it harder to get the cash they need quickly and easily. When financing slows in one sector, it provides openings in others to access some money and continue to grow your business. Now is the time to manage costs while also investing in your dreams. Money is available to smart, agile businesses. Companies can look beyond banks for alternative solutions.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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