There is No “One Size Fits All” Approach to Small Business Financing

Steve O'ConnorBank Loans, Business Plans, Funding Options, Merchant Cash Advance, Small Business FinancingLeave a Comment

There is no such thing as an “one size fits all” approach to small business finance, although standard loan applications may try to dictate otherwise. What’s your strategy for getting money for your business?

Financial Times reported that “non-bank lending to small businesses has hit a five-year high,” and that more small businesses are turning to alternative financing. Similarly, a Forbes contributor recently published a piece analyzing how small business owners view funding, and determining that there is “no one size fits all” approach.

In this article, the writer states, “It makes sense to look at financing options that are appropriate to different situations and how they might work together to help small business owners find the capital they need.”This statement couldn’t be more true. That is, most of today’s small business owners are at least somewhat familiar with the process of going to the local bank branch, presenting a business plan, and applying for a loan. Some are familiar with working through the Small Business Administration (SBA) loan process. But as the Forbes writer states, “many Main Street business owners don’t have the credit, time in business, or revenues to meet traditional loan criteria.” So, what do these business owners do?

In our September 2013 post, we highlighted some of the alternative financing options available to small business owners: credit cards, lines of credit, and merchant cash advances. A smaller, but growing, segment of owners look to crowdfunding to fund their next ventures. This month, we compile the pros and cons of each arrangement to help small business owners like you find the right mix of funding sources to achieve your capital needs.

Funding Source Pros Cons
Credit cards
  • Rebates & rewards – cash rebates can boost
    bottom-line profitability and rewards, like airline miles, benefit the
    card owner
  • Easy to acquire
  • Require no collateral
  • Quick access to funds for immediate purchases
  • Variable interest rates
  • Low minimum payment can keep card owner in debt
    for years
  • Annual fees
Line of credit
  • Good for businesses with seasonal operational
  • Ability to pay down the debt, then borrow
    against it again
  • Qualification requirements similar to
    traditional bank loans
  • Underwriting process may take weeks
  • Best to secure line of credit before it’s
Merchant cash advance
  • Require no collateral
  • Approval within days, rather than weeks or
  • Negotiated, short-term repayment terms based on
    credit card sales
  • Interest rates may exceed those of traditional
    bank financing
  • Good for businesses without access to investors
    or venture capitalists
  • Fills the gap in capital needs
  • Creates new mix of investors
  • Opens the business to shareholders
  • May negatively affect ability to achieve
    traditional bank financing at a later date

There is no single financing solution that will achieve every small business owner’s capital needs; each business is different and has different cash flow requirements. But as the Financial Times cited, more and more small businesses are looking at non-bank solutions to their capital requirements. As you look at your own small business financing strategies, consider which alternative sources are right for you, or find a trusted advisor to help you analyze your choices.

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