As a small business owner, funding is essential to keeping your doors open and ensuring your company can grow. But what happens when you can’t find the funds you need? Unfortunately, you’re not alone—most small businesses lack sufficient funding. Here are some of the most common funding issues faced by small businesses and their solutions.
Lack of Working Capital
Small businesses most common and obvious issue is a lack of working capital. Working capital is the money you need to cover day-to-day expenses, such as inventory, employees’ salaries, and rent. If you don’t have enough working capital, it can be challenging to keep your business afloat, let alone grow it.
One option is to utilize invoice financing. With this financing, you can sell your unpaid invoices to a third-party lender for cash upfront. This can give you the needed working capital to keep your business running smoothly.
Another way is to get a business credit card with a high credit limit. This will allow you to make purchases when you need to without waiting for approval from a bank or other lender. However, the overuse of a business credit card can lead to another reason small businesses might lack funding: bankruptcy.
You need to be careful when using a business credit card. If your business cannot pay off the balance, it could lead to bankruptcy and put your company in a difficult situation.
Bankruptcy happens when a business is unable to pay its debts. While the company will not be forced to close, it could suffer significant financial damage and lose assets, such as a portion of its inventory.
One way to avoid bankruptcy is to work with your creditors on a payment plan. If you can negotiate an acceptable repayment schedule with your creditors, they may allow you to put off paying the balance until you have more cash on hand. You can consult with a local bankruptcy attorney to pull this off. They can help you get a payment plan that works for you and your creditors.
Lack of Collateral
Another common issue faced by small businesses is a lack of collateral. Collateral is an asset that can be used to secure a loan from a lender—typically, this asset is your home or another piece of property. Without collateral, getting approved for a loan from a bank or other traditional lender can be challenging.
Fortunately, there are alternative lenders out there who are willing to work with small businesses that don’t have collateral. One option is called an SBA microloan—with these loans, the maximum amount you can borrow is $50,000, and they typically have interest rates between 8% and 13%. Another option is equipment financing—with this type of financing, you can use the equipment as collateral for the loan. However, as stated earlier, always be careful with whatever loans you make.
Poor Credit Score
If your personal or business credit score is low, it can be tricky (if not impossible) to get approved for funding from traditional lenders like banks. Fortunately, many alternative lenders are willing or able to work with borrowers with poor credit scores.
One option is peer-to-peer lending—with this type of lending, individuals pool their money together and lend it to borrowers with poor credit scores at higher interest rates than what they could get from a bank or other traditional lender.
Another option is merchant cash advances—with these advances, businesses sell a portion of their future sales in exchange for cash upfront (typically at high-interest rates). These are just two examples—many more options are available for small businesses with poor credit scores looking for funding.
This lack of funding can have a significant impact on small businesses. In addition to hindering growth, it can lead to cash flow problems and make it difficult for companies to keep up with new technologies. The good news is that there is a proactive way for small businesses to avoid this obstacle.
Diversify Your Funding Sources
One of the best ways for small businesses to overcome a lack of funding is to diversify their funding sources. Rather than relying on one or two sources of funding, companies should try to obtain funding from various sources. This includes things like grants, angel investors, and crowdfunding.
By diversifying your funding sources, you’ll have more options available and less likely to face a cash flow crisis. And with the right strategy, you can improve your chances of obtaining the funding your business needs to thrive.