With over 30 million small businesses in America, it is not surprising that many will experience cash flow problems at some point in time. From delayed invoices to slow periods, business owners can often find themselves short of money and in need of a cash injection to pay for things like staff, suppliers and other ongoing costs.
Historically, you could go to your local bank for a personal loan. You would arrange an appointment with a bank manager, they would look at your business and your credit and make a decision. But today, there are far more options available.
1. Community development finance institutions
There are a number of community development finance institutions (CDFIs) across the US that offer loans to small businesses on very reasonable terms – and run as non-profit organisations.
CDFIs are more likely to take a view on adverse credit histories compared to banks – and they will also take into consideration your business idea, model and its potential for growth. You will not necessarily need to use any assets as collateral for your loan,
The only challenge is that loans may take a little longer to be processed and not have the same savvy online application process that might come with a bank or private lender.
2. Partner financing
Partner financing involves partnering with a large and more industrious competitor in your space, in return for a share of future profits or access to your intel and facilities.
Some people may see their competitors as someone not to get involved with, but there are certainly synergies and benefits on both sides. For the more experienced firm, they certainly have the knowledge to grow a business in that space and partnering with a smaller firm could be a good opportunity for growth too.
3. Invoice financing
Invoice financing or factoring is perfect to help small businesses with their cash flow by receiving a cash advance on your unpaid invoices. Often used by fashion designers, construction firms, food suppliers or electronics distributors (amongst others) who receive a big order upfront but their client has payment terms of 90 or 120 days or longer.
With invoice finance, they can get the full payment upfront and pay a small fee to the lender for the convenience once the invoice has been fully paid.
You just need to show your outstanding invoices to an invoice finance company who will verify with the vendor and you can receive a large proportion of the invoice fee upfront to pay for stock, goods, staff and more.
4. Convertible Debt
Convertible debt is when you access money from an investor which is later turned into equity in the future.
This means that you receive money upfront to help grow your business or stay on top of your finances and on the basis of it becoming successful, the investor may receive a small stake in the company.
It is very low-risk for a small business and you are not racking up lots of debt or interest in the process.
5. VCs and Angel Investors
Venture Capitalists (VCs) and angel investors can inject large sums of cash into your business – with the intention of generating significant growth.
This can be effective for companies with big aspirations or very scalable startups and looking to achieve million-dollar valuations.
This is probably less suited for a small business who is trying to stay on top of their cash flow – and maybe does not want the pressure of a corporate financial backer.
Some Useful Tips From a Credit Expert
Credit expert and founder of Pheabs.com, Dan Kettle, explains:
“For small businesses in 2021, there are a number of viable options if you are looking to cover a shortfall of cash.”
“You may be inclined to go down the payday loans route if you need money immediately for your business – but this is often not the most sensible and can incur fees of more than 500% APR.”
“You need to look at what your company needs for the next 12 months at least. You want to avoid being reliant on revolving credit and over-borrowing too much, for too long, since this will just start to accrue more interest and charge more for your loan.”
“If you have a one-off cash shortage then a personal loan of something like $20,000 or $30,000 will suffice, but I also like the idea of creating partnerships with large firms or investors so that you have access to more finance if you need it, but above all, you have the expertise to organise your finances and potentially grow your business further.”