If you’re a well-established company with a good market place, you’ve most likely taken out a business loan in some form. This is because, well, it’s pretty much a given when it comes to turning a startup into a profitable one.
The problem is that going from point A to point B requires a lot of resources. To grow from a single store to a franchise.
It’s not only naive for young companies to try to escape any kind of funding, but it’s almost certainly harmful as well. Because of the nature of Return on Investments (ROI), most companies operate by spending substantial capital and, if they’re lucky, returning just a fraction of that value per year or month.
You’ll be wasting a lot of time if you wait for the company to raise enough revenue to finance these expansion projects. This can mean sitting on a small company for a long time without ever putting it to the test to see if it can succeed.
“If you want to be successful, you need the courage to risk failing. Doing nothing means you’ll avoid failure, but it will also mean you’ll avoid success”
You should not afraid of failing and understands that in order to succeed as a business, you must take some risks. Typically, this implies that you must be able to take on any debt.
What factors should you consider when deciding on a financing option?
You can start a crowdfunding campaign even in the early stages of a company, even at the ideation point. This is a way to collect a small amount of money from a large number of people in exchange for the product you’re trying to sell in its early stages, for example. This is a brilliant way to entice people to part with money in exchange for the opportunity to try out the new product first.
Another choice is to seek out an angel investor. They might be willing to give you a large sum of money if you can persuade them of the viability of your business plan (in great detail, of course). In exchange, they receive some equity in the business, which means you own slightly less of it than before. You can do the same thing with venture capitalists, but they will only be involved in companies that are slightly more mature.
A loan could be a better option for those who have moved past the concept stage of their business and do not want to give up any ownership. A well-established company may typically obtain a business loan from a bank at a fair APR (annual percentage rate)—usually under 7%. Offering your huge assets as collateral for a secured loan will also help you get a low APR. This is good news for businesses that have been around for a while and have a decent credit record.
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Many younger or smaller companies, on the other hand, struggle with creditworthiness and have no hope of securing a bank loan. However, there are several alternative funding options available. Alternative lenders make it much easier to get a small business loan than it is to get one from a bank. They actually need very little paperwork, take very little time to process, and have much lower turnover and trading history requirements.
Also Read: Why Small Business Loan Is so Important?
As a result, your APR would be higher. However, most companies should be able to avoid this with proper cash flow forecasting and preparation. A higher APR suggests that it isn’t ideal for long-term loans; thus, if you think you’ll be gearing your business for years with these, it may be a poor idea, as ROI will never outperform the APR. However, the advantage of these more relaxed lenders is that you can normally make early repayments without penalty.
For example, short-term equipment financing can be a great way to expand your company. If you run a printing shop (especially when the technology was still new), you could find yourself completely tapped out with only one printer. Since your single printer is still in service, you can have to place people on waiting lists or drive people away outright. Short-term machinery financing might be a perfect way to buy a few more while working extra hard to pay off those debts in a few months. It might have taken 5 months if you had waited for the gains from only one printer to be reinvested in the new printers. Your company has just doubled in pace as a result of this.
Low-cost bank loans. Alternative funding, on the other hand, will provide quick cash for immediate growth for startups and SMEs.
Alternative financing’s other advantages
Alternative funding is also worth exploring even though the small business is qualifying for a bank loan.
Many business owners are becoming increasingly dissatisfied with the prospect of supplying a bank with endless documents over the course of several weeks or even months while waiting for a decision on an application. This tends to be an unnecessary danger in and of itself. When you should have been focused on revenue-generating operations, you were spending all of your time and resources on predictions, budgets, and plans.
Alternative funding has the advantage of being instant, and cash flow is the leading cause of SMEs failing. As a result, they complement each other. Bank loans can be excellent if you have the luxury of waiting a month or two, but they are simply not feasible for many SMEs. Many of the challenges that low-capital businesses face are immediate, and we need to be aware of our options as they arise.