Financing for your Business

According to a survey completed by the SBA, of the estimated 1 Trillion small businesses borrowed in 2013, about $422 million of this amount was obtained from finance (non-bank) companies. Even though This represents a significant year over year increase in borrowing, small businesses still face challenges when it comes to gaining access to capital and taking advantage of opportunities to grow. It becomes even more important that they look for the right type of financing for their particular needs. There’s been a lot of focus on “alternative” lending recently, but how do small business owners know when this is the right option to pursue?

One of the most obvious and common answers is that businesses seek financing when they’re faced with an unexpected opportunity or challenge that requires quick capital. Unfortunately, most small businesses don’t have the cash on reserve or an established line of credit that enables them to withdraw the necessary funds for these types of opportunities. Alternative sources of lending help fill that void by giving business owners access, availability and speed. The reality is that traditional banks aren’t equipped to do this because it isn’t profitable for them to provide loans of under $200,000. To determine what type of financing makes sense for your business and situation, you must consider what exactly needs to be funded and the timing. Alternative lending helps provide flexibility of repayment and offers creative options.

The right financing option varies for every company, but there are several areas where small businesses frequently make financing mistakes. Here are the common pitfalls and the best ways to avoid them so your small business can choose the best option at each stage of your company’s growth.

Treat opportunity cost like a real cost. Banks routinely take up to two weeks to review a loan application and, if approved, another 15–60 days to fund the loan. For those running a business, that’s time they could have spent generating sales and growing the company. The lowest APR doesn’t always provide the best financing option when you take into account the loss of time spent elsewhere.

The intangible costs for smaller or short-term loans can be greater than interest. The loan amount and pay period matters a great deal. Often, companies in need of working capital are borrowing smaller amounts and paying it back over shorter periods of time than traditional, long-term loans. These need to be approached differently than longer-term loans for large amounts. In these instances, the actual interest rate can be the least important consideration. Since the amount sought is small and paid back rapidly, such financing wouldn’t accrue the large amortization costs common in loans of six months or longer.

Businesses are financing without knowing it. Financing occurs far more often than we realize. By giving your customers a 2 percent discount for paying within 10 days rather than 30 days is really more like a 2 percent finance charge which is equivalent to a 73 percent APR.

Financing is very important to new companies, so make sure you understand how it works. Partnering with an experienced loan consultant can help. Regardless of the type of business you are in, it makes sense to examine your situation closely. This will help you determine the best financing option. Gaining access to capital can be the deciding factor in whether or not a small business grows or survives, so choose wisely when it comes to funding.