According to some recent studies, 82% of businesses fail due to cash flow issues. In order to prevent this from happening, startups and small businesses turn to a plethora of financing practices, the most popular of which are bank loans. However, since the Global Financial Crisis, getting a bank loan is almost impossible for a company that is not fully established. In order to be eligible for a bank loan, you need to have perfectly neat credit records, which is something growing businesses cannot achieve.
Luckily, the number of alternatives to bank loans is constantly rising, providing you with reasonable fees, flexible funding terms, and fast access to your business capital. Here are some of them.
1. Invoice Factoring
Selling invoices is one of the most reliable ways to improve your capital flow. Namely, a small business (you) sells its accounts receivable to a third party, also called a factor. Once you sell the invoices, a factor will give you the money in two installments. They will advance roughly 80% of the total sum within 48 hours, while the remaining 20% (less a factoring fee) will be sent to you once the invoice is paid in full. Most importantly, as a short-term financing solution, selling invoices doesn’t require you to have a clean credit history. Plus there are a lot of invoice financing companies to work with, so you’re able to shop around for the best deal.
However, regardless of how awesome this all might sound right now, you need to know that invoice factoring is not a one-size-fits-all financing solution. Even though it can immensely boost the working budget of cash-strapped B2B companies, it is not a viable option for startups, retail companies, and B2C businesses, since they don’t have enough invoices to factor.
2. Online Business Loans
If you fail to meet any of the abovementioned bank loan requirements, you can always resort to online loans for small businesses. Namely, online lenders like OnDeck, Fundbox, FundingCircle, and Street Shares specialize in providing entrepreneurs with fast and reliable financial support when they need it most. These companies use high-tech software to combine some traditional credit factors like personal credit score and cash flow with untraditional metrics, such as social media interactions, online customer reviews, and the overall company’s performance. This makes the entire approval process much faster and simpler. Companies such as Rahoitu ensure that you are getting the cheapest and most suitable loan.
3. Government Grants
Despite what you might read online or hear on TV, the government doesn’t provide grants for launching a business. However, they allocate grants to specific industries and targeted causes determined by the federal government, such as education and scientific researches. Under the Small Business Innovation Research (SBIR) Program, the government offers a wide range of grants to startups and small businesses engaged in scientific research and development. Most importantly, if you succeed in getting one of those grants, you won’t have to repay them, but you will have to take numerous surveys and deliver reports regularly. What you need to know is that, unlike crowdfunding or invoice factoring, securing government grants takes a lot of time and effort.
Even though this concept has been around for decades, in the last few years, crowdfunding is getting a lot of good press. Many entrepreneurs see this financing option as the most profitable substitute for the traditional means of funding. It is usually defined as the practice of financing a business or a project via the internet, by raising small sums of money from a large group of people.
Crowdfunding not only helps you get money but also enables you to present your ideas to wider audiences. There are numerous crowdfunding platforms, such as Kickstarter, IndieGoGo, RocketHub where you can create your profile and ask for donations. The idea is to create a compelling message, focus on a bigger purpose of your projects, and create an extensive online community.
Finally, it’s important to understand that there are different kinds of crowdfunding, including equity crowdfunding, rewards-based crowdfunding, marketplace lending, and donation-based crowdfunding. So, in order to choose a crowdfunding platform that meets your business’ needs, you first need to do thorough research and, above all, know what your goals are.
Regardless of how brilliant your business idea is, if you don’t have money to support it, it stands no chance of succeeding in this highly competitive small business landscape. On the other hand, you need to be careful when choosing a financing solution for your small business. Instead of taking out a bank loan, which represents a massive and long-term commitment to every growing company, you should resort to its alternatives. Hopefully, with one of the abovementioned funding options, you will manage to cover your expenses and finally turn your killer idea into a successful business.
About the Author
Dan Miller is a Payments officer with nearly ten years of experience in banking and international payments in the Australian banking sector. He has a master’s degree in finance and banking. He is married and also a father of a beautiful little girl.