At first glance, the state of small business financing seems somewhat puzzling. After $64 billion was pumped into the economy this year directly aimed at reviving smaller businesses, coupled with the on-going presence of historically low interest rates making it cheaper to borrow money, it seems that small business lending should be on an upswing. But the majority of small businesses aren’t biting.
A recent survey by National Federation of Independent Business (NFIB) suggests that the many small business owners today are still reluctant to make any significant investments in growth or development and may not seeking additional financing in the first place. There could be other factors as well influencing the rate of small business lending, such as that businesses may have fewer assets to secure a loan, are sporting less than perfect credit, or are dealing with sluggish sales and weak profits.
The fact remains, however, that most healthy businesses still need additional capital to operate- even just to cover a temporary cash shortfall. So what should you do if you are part of the population of small business owners unwilling or unable to get financing in these tough economic times? Here are 5 tips to keep in mind:
1. Keep your business and personal finances separate. It is vital that you separate your business finances from your personal financial activity- not only because it helps keep your financial records accurate, but also because it makes the business look more professional and worthy of receiving funding. This means having separate business bank accounts, credit cards and places to record financial transactions. You may also want to form an LLC instead of a sole proprietorship.
2. Use your revenues as assets for financing. There are several asset-based financing arrangements that will allow you to leverage your business’s revenues, such as accounts receivables factoring and financing and merchant cash advances based on future sales. These methods of financing can be more expensive, but they have many benefits such as that they come with easy repayment and they are not approved based on the credit profile of the business.
3. Seek out smaller loans. Though most small business lending has stalled, when it comes to microfinance, business is booming, reports BankRate.com. Microloans are short-term loans of small amounts- usually no more than $25,000 over 5 years. If your needs are modest, there is a network of commercial microlenders and nonprofits dedicated to making these loans available to small business owners. Your chances of being funded will increase if you are a minority, have a low income, or are seeking to start a business in an economically challenged area.
4. Get creative. If you put your mind to it you may find that you are able to access additional capital via non-traditional means. For some, a crowdfunding platform (where you ask for small donations from many people) may be an option. You may also be able to generate revenue by leasing out used property and equipment or becoming an affiliate advertiser of a non-competing business.
5. Bootstrap it. The true definition of bootstrapping means relying solely on internal sources of financing, such as revenues, to operate and grow a business. Though your rate of growth in this case may be slower since you can only spend what you have, it may help you to pay down any debt that you have accumulated thus far. This will help to boost your credit score and increase your chances of receiving outside financing should you need it later on.
In short, just because it’s a challenging economy doesn’t mean that your access to capital should also be challenged. With a little flexibility and creativity you can get the capital your business needs to successfully operate and grow even in these difficult times.
Gary Barzel is the manager of business development for Fastupfront. Fastupfront offers working capital alternatives to small business loans for existing businesses.