According to WalletHub’s national Small Business Week survey on the state of their finances, small business owners are optimistic but still report needing better access to capital. With more than 543,000 new businesses started every month, the survival rate is still threateningly low – some two-thirds will only survive into the third year.
Traditional sources of small business capital include the basics like personal assets, bank loans and friends and family. Once these are exhausted, business owners can struggle to make ends meet. The next tier of banking options can include much-needed revenue but are a bit more creative in nature.
Supplier financing – Small businesses can offer products that can be sold on contingency, deferred with interest and even have straight funding options. These can provide the business with an initial offering while the business sells the items making enough profit to repay the vendor(s) and restock or increase merchandise offerings in the future.
Seller financing – When a business owner wants to sell but also is willing to act as the ‘bank’ in the financing deal, this is called ‘seller financing’. The financial arrangement allows the new owner to repay the purchase price on a monthly basis over a period of time directly to the seller versus obtaining financing through a traditional lender.
Factoring – When your finances are tight, another option is to sell any money owed to you in the future in your accounts receivable to a company called a ‘factor’. The factor will pay you less for your accounts receivable than it is worth down the road, but selling it will provide some immediate capital. Be cautious that this doesn’t become a regular habit as much of your profitability is lost in factoring and it is not a solid business strategy long-term.
Peer to Peer (P2P) Lending – A relatively new method of debt financing, these services can leverage a technology platform to operate a credit market where users can borrow and lend money without the use of a financial institution as an intermediary. P2P loans tend to be less volatile than the stock market and can offer higher returns than more conventional sources of yield. Borrowers must apply for the loan as an individual using his/her personal credit score.
Crowdfunding – By selling shares in the business, small business owners can grow the business with the help of their own community. Bear in mind, that crowdfunding, by its nature, requires a strong internet presence where the business owner can keep in touch with funders and apprise them of the company’s progress with their investments.
Competitions and Grants – Not the fastest or most reliable way to raise money, start up competitions and grants can often provide innovative ways to increase cash flow. Competitions happen throughout the year and vary by business specialty and industry. Ever popular on television with shows such as Shark Tank and even cooking shows like Food Network Star, cash infusions by offering stakes in the business or prize money can kick-start a small business with both notoriety and cash. Grants, especially Federal grants through sources like the Small Business Association, are more competitive and difficult to obtain but also a worthy prize for the victor willing to put in the work.
Whatever path is chosen should be carefully considered and the consequences weighed. Always talk with a financial advisor or small business consultant to be sure that the options are in your best favor. To learn more, talk with a PASBA Small Business Advisor by clicking on the Find an Accountant link on this page.
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