If you’re a well-established business with a strong foothold in the market, you have likely taken out a loan in some form or another. The reason for this is because, well, it’s pretty much part-and-parcel of growing a startup company into a successful one.
The thing is, it takes so much energy to get from A to B. To go from a single store to a franchise, or a great idea for an app to a functioning one with 50,000 downloads.
It’s not only naive for young businesses to want to avoid financing the company in some way, but it’s almost certainly detrimental too. The nature of Return of Investments means that most businesses operate by investing in significant resources, and returning only a percentage of that value per year or month if you’re lucky.
Waiting around for the company to generate enough income to fund itself for these growth projects means you’re wasting a lot of time. This can mean sitting on a small business for a long time without ever really testing if it’s going to work out.
Successful British tech tycoon Peter Jones once said “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”. This also goes hand-in-hand with another sentiment he shared on his hit show Dragon’s Den when he claimed: “if you’re going to fail, fail fast”.
This is because he’s not afraid of failing, and realizes that you have to take on some level of risk if you want to grow as a company.
Usually, this means you have to be willing to take on some level of debt.
How to choose between financing options
In the early stages of a business – even at the ideation stage – you can begin a crowdfunding campaign. This is a way to raise a little bit of cash from a lot of people, and in return, you may give them the product you’re hoping to sell at its beta stages, for example. This is a great way to get people to hand over some money and in return, they get to be the first ones to try your new product.
Another alternative is to find an angel investor. They may be happy to give you a significant amount of funds if you manage to convince them of your business plan (in great detail, of course). In return, they get some equity in the company, meaning you own slightly less of the company than before. You can also do this with venture capitalists, but they may only be interested in slightly more established businesses.
A loan may be slightly more suitable for those who are past the idea stage of the company and do not want to give up any ownership of the company. Usually, a very established business will be able to get a business loan from a bank at a good APR (annual percentage rate)—under 7%, usually. A low APR can also be achieved by offering your large assets as collateral for a secured loan. This is great news for companies who have been in the game for a few years and have a very strong credit rating.
However, many younger or smaller businesses struggle with creditworthiness and stand very little chance of getting a bank loan. Thankfully though, there are some alternative financing options. Small business loans from alternative lenders are much easier to get than from a bank. In fact, they want very little documentation, take very little time to process, and require much smaller turnover numbers and trading history.
As a result, you’ll pay more in APR. But with the right cash flow forecasting and planning, this shouldn’t get in the way of most businesses. A higher APR means that it isn’t suitable for long term loans – so if you think you’re going to gear your company for years using these, it may be a bad idea because ROI may never outperform the APR. But the beauty with these more laid-back lenders is that you can usually make early repayments with no fee.
Short term equipment financing, for example, can be a great way to expand your operations. If you ran a 3D printing shop (particularly when there was still a buzz around it), you may find yourself absolutely maxed out with just your one printer. You may have people on waiting lists, or outright turning people down because your single printer is always in-use. Short term equipment financing could be a great way to buy a couple more, and work extra hard to get those debts paid off within a few months. If you had waited for the profits of just your one printer to reinvest for the new printers, it may have taken 5 months. This has just accelerated your business at twice the speed.
Would this be appropriate for Tesco to use? No, it would be extremely strange as they can get their hands on long-term, low-cost bank loans. But for startups and SMEs, alternative financing can be instant cash for instant growth.
Other benefits of alternative financing
Even if your small business can actually be approved for a bank loan, alternative financing is still worth consideration.
Many business owners are becoming increasingly unhappy with the idea of supply endless documents to a bank over the course of several weeks or even months, to await the verdict on an application. This sounds like undue risk in and of itself. Wasting all the time and energy on drawing up forecasts, budgets, and plans when you could have been focusing on some revenue-generating activities.
The benefit of alternative financing is that it is instant, and the number one cause of SMEs failing is cash flow. Thus, they go hand-in-hand. If you have the luxury of waiting around for a month or two, then bank loans can be excellent, but it’s just not feasible for many SMEs. Many issues that pop up for low-capital companies are very urgent, and we need to be aware of the options we have when these issues arise.