Helpful finance solutions for small business success
August 2, 2019
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Gone are the days when financing your small business meant an inevitable trip to the bank. Today, thanks to financial technology (fintech), the finance industry is considerably broader. Small business owners have options aside from simply applying for a small business loan and waiting for the bank’s approval.
Which, more often than not, never comes. According to the Small Business Lending Index issued by Biz2Credit, big banks approve only 27.3% of small business loan applications. Smaller banks are more generous: your business has a 49.4% chance of approval when applying for a loan at a small bank.
Alternative lenders, however, are the best in this regard. With a 57.3% approval rate, business owners can apply for a small business start up loan with confidence.
Read on to discover the most popular finance solutions for small business success.
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Despite the low approval rate, small business owners still turn to banks with their funding issues the most. According to a survey run by Small Business Administration, American small businesses currently have $600 billion worth of business loans.
The average size of a small business loan is $663,000, although more than half of loan seekers apply for only $100,000 or less. The main reasons behind a loan application are business expansion (59%), help with cash-flow problems (40%), and loan refinancing (26%).
Lines of credit
Another popular feature of small business banking is a line of credit. You can use it to fund smaller, ongoing expenses to tie you over in periods of cash shortage.
A line of credit is very similar to a small business credit card. Given over a certain period of time (usually a month), the funds are there for smaller expenses like purchasing office equipment.
You can use any amount below the threshold, and your lender only charges interest on the amount you actually withdrew. However, make sure to track your spending and mark all the funds you used in your small business accounting software. Overspending is one of the reasons small businesses end up in debt.
Many banks offer varying lines of credit for small businesses. Check with your finance advisor to determine whether a line of credit would be the best option for your company.
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If you want money you don’t have to give back at some point, business grants are your best option. Both government and corporate grants are available for small businesses for a vast array of reasons, including modernizing equipment, fostering social inclusion, or diminishing a business’ environmental impact.
Since business grants can also be referred to as “free money”, there are usually rigorous eligibility requirements in place for most of them. Also, should you win the grant, you’ll have to prove that the money is spent on exactly what your application indicates. In other words, you can’t finance a car with money you got for modernizing your assembly line.
That being said, small business grants are definitely worth looking into. Check out if you’re eligible for one and how to apply.
When you want to start a small business but lack the funding, you may turn to angel investors. Unlike venture capitalists who invest large amounts of money “for a living”, an angel investor is any individual who gives capital to a small business to start its operations. This includes your friends and relatives.
Even though angel investors are not always high-profile finance people, they deserve the same treatment as a venture capitalist would. Show them your business plan and finance calculations, and explain how their investment will help your business.
If you don’t know anyone with a dime to spare, you can look for angel investors in the larger business community. In that case, your pitch has to be even more professional and polished than with family members.
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Alternative funding options are hot on the heels of traditional bank loans and business grants. Although it sounds like an invention of the internet era, crowdfunding is not exactly new in the finance world. French philosopher Auguste Comte used an early form of crowdfunding to finance his work back in the 19th century.
Today, crowdfunding is a rapidly growing industry. By 2022, the market’s value is expected to reach a whopping $89.72 billion globally. And 41.4% of all that is raised by businesses and entrepreneurs.
Much like with angel investors, you need a killer small business idea for crowdfunding. Share your enthusiasm with potential donors, explain why your business needs their support, and let them know how you plan on giving back to the community.
While your idea doesn’t have to explicitly serve the interests of donors themselves, it still has to have some “greater good” value so that people would feel good about donating to your cause.
Invoice discounting and factoring
If you’re momentarily short on cash because of a starving accounts receivable, you may consider invoice discounting or factoring. There’s a small but important difference between the two.
Invoice discounting means that a third-party lender gives you a loan against an unpaid invoice. Once your invoice is settled, you can repay your lender. This is a great solution if you’re in a temporary cashflow hell.
Invoice factoring, on the other hand, means that you sell an outstanding invoice to a third party lender. From then on, the lender is responsible for collecting payment from your debtor. For example, if you apply for Veem Early Invoice Factoring, you can get your money within 24 hours. This is the perfect way to improve your cash flow and get paid quicker.
The world of small business financing keeps widening. New lenders, more options, and exciting opportunities make it so much easier to get your small business idea off the ground. Research your options and find the best financial solutions to help achieve your business goals.