Traditional sources of financing business such as bank loans pose a challenge to small and medium businesses. In particular, innovative, new, and fast growing enterprises with higher risk profiles can’t get the funds they need from conventional sources. The same is the case for firms in transition like those in the process of changing ownership or control.
Every business needs funding at different stages such as when starting, embarking on a new project, during expansion or when finding its footing following losses. External financing in the form of just right loans is the most suitable means of achieving these objectives. In fact, external financing is essential to start, meet operating expenses such as payroll and inventory, and to grow the business.
Challenges of obtaining a bank loan for enterprises
Financing is a major hurdle facing most enterprises. Yet, many entrepreneurs are intimidated by the prospect of obtaining funds from the traditional sources, especially the banks. This is because these institutions set high lending standards which few enterprises can meet.
The situation is such that it is difficult for small businesses to find, request for, and obtain financing. Most financial experts think that this problem stems from the fact that most enterprises don’t take time to prepare for the process. They say that the issues around bank loans can be sorted out through due diligence.
This means that entrepreneurs looking to obtain external financing must have all the necessary documents needed by the lenders. This may work for established business. However, the problem remains for innovative, newer, and fast growing enterprises with higher risk profiles.
Alternative sources of Entrepreneurship Financing
To overcome the challenge of obtaining financing from conventional sources, many entrepreneurs are exploring new approaches to funding. This means that the most successful entrepreneurs are the ones who think outside the box. They think creatively about what they have to offer and also how to secure funding.
They know relationships are the key to securing funding, so the develop quality networks. Their approach is to sell themselves, more than what they have to offer, to secure all alternative sources of financing. Also, they remain open minded and never rule out any approach.
Some of the top new approaches include-
Personal financing
The most successful entrepreneurs use their own resources to start the business. They save money over time and grow a fund they can use to start the venture. They also know that no investor will finance a deal where the entrepreneur has no financial stake in it. Personal financing is necessary to get the idea off the ground.
Personal credit lines
Credit cards come to the rescue of many small businesses. They are easy to get because they don’t need a lot of credit history. In fact, there are many startups that have used this approach. The main benefit is that the entrepreneur retains complete control and ownership while meeting the minimum payments.
IRA financing
The Investment Retirement Account monies and 401k’s are among the most accessible alternative financing sources for new businesses today. An entrepreneur can easily find many people willing to loan them money from their funds for the right terms. However, the entrepreneur must sell themselves and their idea to the lenders.
Microloans
There are private lenders and non-profit organizations that offer small business loans. These can be useful to entrepreneurs who can’t qualify for bank loans. Also, they are suitable for micro business.
Online lenders are useful for entrepreneurs who lack collateral, need financing quickly and lack a track record.
Crowdfunding
The internet has revolutionized the way many things are done including business funding. Now entrepreneurs can find a group of likeminded people who can back their businesses through small contributions. This approach is evolving beyond non-profits and will soon include small equity investments.
Peer to peer financing
In this approach, a group of peers comes together to help each other financially. This approach can be used for a wide variety of financial needs. Entrepreneurs can use it to find successful peers willing to finance them.
Vendor financing
In this approach, the entrepreneur talks the manufacturers and suppliers of goods and services into deferring their payments until the products are sold. This can lead to an extension of payment terms to a duration of months or longer. However, this depends on the entrepreneur’s creditworthiness and payment of additional fees.
Purchase order financing
Purchase order financing firms enable new businesses to overcome scaling problems. Most startups are unable to accept large orders because of lack of funds to make and deliver the products. Purchase order financing firms provide the needed amounts of cash directly to the suppliers. This enables the deal to be closed, and profit to accrue to the new business.
Account receivables
This approach is similar to purchase order financing. The difference is that the funds are provided to cover unpaid balances not yet due or received from clients. This approach is useful for high volume new business beginning to scale up. It provides the funds on the sales immediately instead of waiting for payment which can stretch from 30 -60 days or longer.
Family and friends
Many successful entrepreneurs tap into this resource. Usually, the commitments are positioned in writing as bridge loans or promissory notes. These can be converted to equity at a rate decided by other investors later on.
In conclusion
Every business needs funding at various stages such as when starting, embarking on a new project, during expansion or when finding its footing following losses. External financing in the form of loans is the most suitable means of achieving these objectives.
Yet, traditional lending institutions have set high lending standards which few enterprises can meet. To overcome this challenge of obtaining financing from conventional sources, many entrepreneurs are exploring new approaches to funding.
They think creatively about what they have to offer and also how to secure funding. Their approach is to sell themselves, more than what they have to offer, to secure all alternative sources of financing. Also, they remain open minded and never rule out any approach.
