March 4, 2019 | By Peyton Sawyer
Being a small business owner is no easy task. There can certainly be rewarding parts at times, but it isn't without its challenges. Unexpected issues can arise from time to time, and depending on the severity of the situation, the extra expense could have the potential to jeopardize the future of your business.
Besides the regular operational costs you have to prepare for, you must also consider the unexpected costs that can affect your bottom line. Starting, growing, and sustaining a small business can be difficult, especially with the financial pressure we are faced with today. People aren’t spending as much because they simply don’t have the money. So, what does that mean for an independent business owner like you?
Many business owners and entrepreneurs are dealing with business funding hurdles that ultimately results in a denial. As a business owner, how can you prepare your business to overcome these financial challenges? Let’s take a look at what to consider before seeking business financing.
Knowing and understanding your funding options should be the first step in the lending process.
Traditional Business Loans
Traditional business loans from a bank or credit union follow a stringent approval process, making it difficult for small business owners like you to access funding. You may wonder why this happens, and what choices you are left with if your loan application was rejected.
Applying for a traditional business loan with a major bank or credit union is usually the first step for every business owner. Along with being the most common approach, it can also offer the best interest rates.
The financial crisis that occurred some years ago is one reason business owners are having such difficulty getting approved for business financing. The crisis prompted a series of lending reforms that introduced tightened regulations and limited credit availability to small businesses around the world.
Small businesses present a greater lending risk than larger corporations, making banking institutions nervous to approve lending. Underwriting a small business loan costs the same as underwriting a big business loan, causing banking institutions to shift their focus on lending. Many have decided that small businesses are not worth the increased risk.
Business Credit Cards
Using a business credit card as a form of working capital is one way that small businesses survive. Accessing funding through available credit on a credit card to make purchases or even cash withdraws can help to sustain the business.
But any credit card, whether it is used for personal use or toward business expenses, will carry a high interest rate. Making sure to stay on top of your payments, or paying off the charges monthly will help to keep the high interest charges under control.
Approval for a business credit card, like a personal credit card, will depend on the applicant's credit score. If your credit history is lacking or has any discrepancies on it, then your request for credit could be denied.
Using Working Capital
The definition of working capital is the measure of a business's short-term financial health and its operational efficiency. The ratio for working capital consists of a business’ current assets and current liabilities. This ratio will indicate if a business has enough short-term assets to cover their short-term liability.
Having a healthy working capital means that your business assets exceed your business liabilities. If they do not, your small business could be at risk of defaulting on creditor payments.
You can use your working capital to help sustain the future of your business when business financing from a traditional lender is not an option. If you do not have enough working capital to do so, and another funding option is necessary, then an alternative business loan may be able to provide financial relief.
Alternative Lending Options
If you are looking for an alternative loan option to help your business get back on track, a non-traditional lender may be the way to go. There are non-traditional lenders out there that can provide you with the business funding you need with online lending or alternative business loans.
Taking the time to research and compare each lending option, will help you find the right loan for your business.
Online lending options have become quite popular in the lending market. Especially since a traditional bank loans have become so hard to obtain. Small businesses are finding that online lending is an easy solution to their fast cash needs. With easy access, and speedy loan processing, its popularity has increased over time.
While this type of lending introduces higher interest rates than private lenders, such as a bank or credit union, it may be the only option a business owner has for funding. Without the credit, length of time your business is required to be in operation, or the collateral needed to be approved by the bank, alternative lending may be the only viable option.
Alternative Business Loans
If you have exhausted all of your business financing options with a traditional banking institution with nothing to show for it other than a denial and a waste of time and energy, don't worry! You do have other options.
After the lending reform, non-traditional lenders have made it possible for small business owners to receive the funding they need without the stringent loan process that a traditional lender demands.
Today, you will find that most small businesses are looking to alternative lending to handle their funding needs. Alternative lenders are introducing more attainable funding options for the borrower.
While alternative business loan options have leveled the playing field, making it easier for small business owners to receive business funding, they also have the potential, like any loan, to damage a business.
When borrowing money from any lender, whether it is for personal or professional reasons, be sure that you only borrow what you need, and secure an interest and payment schedule that you or your business can afford to pay back. Taking the time to understand the terms and conditions of the loan agreement before you sign is extremely important.