Financial capital is an essential but often elusive aspect of running a business. Capital is beneficial on several levels. The obvious is to meet overhead, such as lease payments, utilities and payroll expenses.
However, cash is also leverage to grow your company in ways not otherwise possible. This may be in direct ways that increase revenues, or indirect means that cut costs or taxes.
- Supplier discounts for bulk purchases
- Seize growth opportunities
- Increase productivity with upgrades to personnel and equipment
- Reduce or eliminate interest expense
The challenges to obtaining a business loan can equal the benefits. In particular, startups and new companies often don’t meet the rigid criteria of banks.
Typical obstacles include:
- Business History – 2 years of tax returns with positive net income are preferred.
- Credit History – A credit history under your business tax id is often needed. Sole Props will require strong personal credit.
- Quality Collateral – Lenders often ask for 75-100% collateral coverage on general purpose loans. The collateral will be evaluated for quality, i.e. heavy machinery is better than tables and chairs.
- Industry – Restaurants, nightclubs, construction and even chiropractors could be seen as high risk.
- Updated Financial Statements – Banks may require updated income statements and balance sheets. Many small companies have basic reporting that only produces quarterly or semi-annual updates.
Thankfully, there are more alternatives than ever to traditional business loans. You can often parlay what banks see as weakness in to strength with non-traditional financing.
Here are financing choices for various situations:
Donation Based Crowd Funding:
Sample Customers: All industries. Best suited for companies needing small amounts for specific purposes.
Social equity is a fast rising concept in business and personal life. Donation based crowd funding uses this concept to raise money for companies.
Companies can post their needs on various crowd funding sites. The site will verify your business exists and other basic criteria. Investors will review your needs and can contribute capital to the cause. $25 and up is a typical donation.
Instead of repaying a loan, you may offer free products, discounts or even certificates of appreciation.
Benefits of Crowd Funding:
- Easy Qualifying – Credit, history and industry are not barriers to qualifying.
- Broad Exposure – Many crowd funding sites with heavy traffic are available.
- Non-Financial Repayment – You will not repay with money in donation crowd funding.
- Validate Customer Demand – Product strategy may need tweaking if your free widget doesn’t raise donations.
- Proof of Concept – Shows new ideas have real world value.
Limitations of Crowd Funding:
- Amount of funding – Donation crowd funding is best for small amounts. Raising money for buying a new oven or carpet cleaning equipment is more feasible than cash to buy a building.
- Turnaround to raise cash – Unless you have an earth shattering innovation, it may take time to raise money for ordinary needs. You should plan accordingly and not expect immediate results.
- Investors are still picky – If your business is struggling or has limited history, even goodwill investors may be reluctant to give twenty bucks. Best Practice: Focus on how the money will benefit your business, rather than desperation pleas.
- Repayment still required – Crowd funding sites will ban your company or assign a low rating if repayment is not made. Investors may use social media to bash your company in these cases. Best Practice: Offer realistic repayment and follow through.
Accounts Receivable Financing/Factoring:
Sample Customers: Medical offices, construction contractors, manufacturers. Companies that do not qualify for lines of credit or credit cards.
Factoring is an option for companies with high accounts receivable. You sell A/R to a lender for a discount percentage, which will vary based on the quality of receivables. For instance, receivables from a brand name company are seen as less risky than an individual.
Credit score is not an issue as no debt is assumed. How much you receive for invoices will mostly depend on the quality of outstanding A/R.
A/R financing is well suited for companies who wait long periods of time to get paid. Examples may include medical offices waiting for insurance billing to clear. Construction contractors needing to buy supplies while waiting for payment from general contractors are another example.
Sample Customers: Restaurants, Bars, Retail Stores. Challenged credit scenarios.
Food establishments and retail stores may turn to specialized merchant loans. In this case, a lender will advance cash in exchange for a claim on future credit card sales. The repayment period is typically up to 1 year. Your daily credit card sales will be tapped until the merchant advance and premium are repaid.
Best Practice: Consider merchant advances only when credit cards are not possible. Why? These advances are expensive. Fees of up to 30 cents per credit card sale may exist.
Be sure to understand the terms and calculate ROI from a leverage standpoint. Money from a cash advance should be used for a purpose that justifies the higher premium.
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