If there’s one thing that can potentially sink a small business, it’s a lack of understanding and/or a lack of preparation for financing. Experts agree that sooner or later, most small businesses will need financing, for a variety of reasons. These could include evening out cash flow, making an advantageous inventory buy, bridging seasonal ebbs and flows.
But as the economy continues to improve, small business financing has taken on even more importance. That’s because increasingly, small (and mid-sized) businesses will obtain and use financing to take advantage of growth opportunities. This could entail expanding, buying another business, adding new products. Anything that helps move your business to the next level.
But too many small business owners can still find themselves with business financing problems, because of a lack of information, misinformation or perhaps some missteps. But most of these can be avoided with a little foresight.
The Houston Chronicle’s Small Business Chron says that the lion’s share of business financing problems can arise from two issues: too little cash flow and/or too much debt. Here’s a quick look at these and other common financing problems that businesses encounter:
- Insufficient cash flow. This can go hand-in-hand with getting loans to help with restructuring, retooling or expanding into new markets–IF the business doesn’t take on too much debt.
- Too much debt. Business owners definitely need to avoid getting to the point where debts and liabilities outweigh revenue and cash flow, which is unsustainable.
- Poor financial management. From the start, try to establish the discipline of a business plan and budget as fundamental guides to operating our business.
- Debt-to-equity ratio. This is a number that represents how much you owe (debt) compared to have much you have (equity, or cash). Obviously, you’re shooting for a smaller number here, but what’s acceptable does vary somewhat from industry to industry.
- Sounding the alarm: Knowing when. Regularly tracking your expenditures and cash flow against your plan will enable you to stay ahead of the curve if you begin to see things heading south. This gives you time to put solutions in place before things spiral out of control.
But what about financing solutions? It’s good to understand your options before you find themselves in a place that you need them. By now, it’s no surprise to anyone that traditional lenders (banks) have pulled back considerably from lending to small businesses, even many that would have previously been considered credit-worthy and solid. Credit standards have tightened to the extent that only the most solvent and most profitable businesses, and those with substantial collateral and personal guarantees, are able to get bank loans or lines of credit. And even then, the process is a long, laborious one.
But businesses are finding a bright spot in business financing: Alternative lenders. Lenders, like us, that are willing to lend to all kinds of businesses, for all kinds of reasons.
Because we concentrate on providing growth-oriented capital to our business clients, or in other words, capital that will help propel the business forward, the upward trend in loan and client size that we’ve seen can only mean good news in the business community. It says that businesses are “on the grow” again, everything from expanding or remodeling their facilities to expanding their product lines to even buying or merging with other businesses. It says that there’s abundant opportunity out there, and businesses are feeling confident and optimistic enough to take advantage of those opportunities.
To that, we say two things: Cheers! It’s about time for some business optimism and confidence! And also, let us hear from you when you’re ready to leverage your own opportunity to grow!
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
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