Many small businesses these days need some form of financing before they can start or grow their business. For most people, that means negotiating with a bank to get the loan they need. But this is only a good solution in theory. In general, you will have to consider another alternative to traditional business bank loans.
Problems with Bank Loans
Actually, there is a long list of potential problems with you deal with banks so let’s just mention the most important ones:
- The approval rate for business bank loans are not quite as high as many businesses hope. If you plan to borrow less than $100,000 the approval rate is about 46%. For greater amounts, the approval rate is 60%.
- Many banks don’t see many small businesses as good investments. They are not impressed with common businesses problems such as low customer demand and unreliable cash flow, and they are not exactly enamored of the low credit ratings of some small business owners either.
- Banks nowadays shy away from loaning to small businesses because they are expensive for banks, and yet they don’t offer a lot of profit anyway.
- Even if you do get a loan from a bank, the entire process will eat up a lot of your time. And often, the loan you’re offered may not be enough to meet your immediate needs. You can apply for a $200,000 loan and your bank can offer to lend you just $40,000.
If a traditional business bank loan is not possible, often small businesses obtain funding through one of two ways: using a credit card or selling equity.
Many small businesses have used credit cards as a way to get the additional funds they need for their business. It’s really quick and easy, and for immediate needs they can’t be beat. But there are serious downsides to this method. For one, the interest rate can be atrociously high. You can pay too high a price for the privilege of using those additional funds. Another problem is that the credit limit may not be enough, and you may find yourself maxing out your credit cards and still having some problem with your capitalization.
Other companies solve their problem by selling a percentage of their company to venture capitalists. For example, if the value of your business is $2 million, you can sell off 20% of your company and receive $400,000 in short order. But here the problem is that you’ve lost 20% of your company—and future growth means that you only get 80% of your future earnings.
Fortunately, if you have a need for further financing many institutions are offering newer alternatives. Some institutions offer loans which you can pay off giving them a percentage of every credit card payment made to your company. Some restaurants have made use of this method, and the big advantage is that your monthly payments will depend on your revenue. If your sales are slow, then you pay only a little amount for the month.
Another method is to use your invoices. You can sell off your accounts receivables for a percentage of their value so you get your money immediately. Some institutions even offer you a cash advance when you receive a purchase order so that you have the money to meet that order.
So when you need additional money for your business, you can at least console yourself with the fact that there may be a more ideal alternative to traditional business bank loans if a bank can’t help you get the financing you need.
Need working capital? Call 1-888-382-3766
To visit our site for an instant quote click here