Are you a small business entrepreneur facing financial struggles? If yes, please pull your chair a little bit closer. The reality for most businesses is the struggle to have proper cash flow. The impact on the company is quite considerable.
Indeed, this is one of the many reasons why new businesses will not make it. And, the problem is not only applicable to small businesses. Even the more established ones admit to problems managing cash flow.
A major challenge for small businesses is accessing bank loans. A paltry 38% of companies with less than 5 million income will get bank loan approvals. Reasons why banks will turn down SME loan applications are many.
25% do so because the business does not have good enough revenue, resulting in cash flow issues. 21% turn them down because the business is not big enough. 18% say no because of the company’s poor credit history.
The advantage to small businesses is the availability of alternative lending platforms. These have become a lifesaver for companies that would not qualify for bank loans. Like their counterparts, these lending platforms have a range of loan facilities. Continue reading to learn more.
Alternative Lending Options: Why They Are Gaining Popularity
As a business owner, you know how stringent bank loan approval requirements are. You must provide so many documents. Such include business plans, financial details, and account receivable or payable information.
Bank institutions may even ask for audited financial statements, personal financial details, and insurance. You would think that is enough, right? They may also ask for collateral, past returns, and a good credit score. For a small business, the qualification criteria may be quite limited.
Alternative lending options do not have so many requirements. The application process is not as stringent as traditional loans.
You can apply for and receive funds within 24 hours. All the lenders need is proof of business registration. They may also check that the company has a physical location in a specific country.
Best of all, you don’t have to have been in operation for years. It could be as little as three months with proof of income to qualify. Let’s look at some of the small business loans available
Types of Small Business Loans for Entrepreneurs
Entrepreneurs have so many types of business loans available to them. A startup can apply for small business funding capital with ease on alternative lending platforms. The money can go towards business growth plans, and dealing with business uncertainty. You can use the funds for marketing, as well.
The capital can also go towards buying inventory, business expansion, and payroll. Without working capital, the company will not keep up with its day-to-day operations.
An inability to pay suppliers means no inventory for customers to buy. But without such, it will not be long before the company shuts its doors.
1. Term Loans
Term loans are ideal for long-term business investments. You enter an agreement with the lender on the repayment schedule and time.
Fixed-term loans fall in the same category. In this case, the lenders put a fixed interest amount that will not vary within the loan period. That protects you from market fluctuations that could impact the interest rate. Take the example of times of inflation. It is not uncommon for the rates to skyrocket.
Do note that some of the other loans we will discuss can fall under term loans. It all depends on the agreement you have with the lenders.
2. Invoice Financing
Many times your business could be doing well but on paper. That means the number of pending invoices shows that the company is selling. Yet, until you receive the payment, all you have is, well, paper wealth.
While waiting for customers to pay, the impact on cash flow can be quite significant. If no money comes into the business, there will be no money to handle the daily logistics. Invoice financing gives you the money to continue operating. The lenders use the invoices as collateral.
3. Business Lines of Credit
Loans are fantastic because you get access to cash that can save your business. Yet, every amount you borrow comes with the attendant interest rates. Whether you use the money or not is not a concern of the lending institution. At the end of the loan term, they will expect full payment of the capital and accrued interest.
Business lines of credit allow you to pay back only what you use. The lender will avail an amount whose limit you cannot surpass. Like in the case of credit cards, the interest applicable is only on what you draw.
Business lines of credit are fantastic for emergencies. They also provide businesses with a cash cushion. For more long-term investments, fixed-term loans would work better.
4. Equipment and Inventory Financing
Businesses that deal with tangible products must have inventory. Without enough stock, you risk disappointing customers who may never return. Inventory financing provides funding for such purposes.
The same applies to equipment financing. You borrow money when you need to buy, update or repair machinery. The advantage is you do not take a massive chunk out of available resources for such expenses.
5. Working Capital Financing
If the business is facing a cash flow issue, there is the option of working capital loans. Such short-term loans provide a solution to managing day-to-day logistical matters.
Entrepreneurs can navigate tough economic times with the right business loans. The range of options available means you will most likely find something that suits you.
Determine your needs, and then shop around for the right lenders. Alternative lending is a funding solution for small businesses.
Make sure you take the time to research the lender well. Read online reviews for honest feedback on what you can expect.
Finally, don’t be afraid to ask the lenders the crucial questions. You should, for example, seek absolute clarity on the fees structure. Hidden costs can drive up the loan amount.
Also, ensure that the business can handle the loan repayment terms. Remember, skipping or delays in payments can impact your credit score.