Like any venture, there’s a right way and a wrong way to finance a small business. Given the fact that eight out of 10 SMEs fail, you definitely want to be in the ‘right way’ category. Lucky for you, it’s not as hard as it sounds. With the right tactics, you can set your small business up for long-term success.
Of course, in order to know what’s right you’ve also got to know what not to do. So what finance ‘faux pas’ should you avoid at all costs? Here’s our guide…
- Don’t settle for bank overdrafts
Banks love handing out overdrafts, as they’re a guaranteed way to make cash. But for the small businesses paying the ultra-high interest rates, the deal’s not quite as sweet. In fact, it’s downright bitter. So when you find you’re scraping the bottom of your bank account barrels, don’t switch into default overdraft mode. Instead, consider alternative finance solutions designed to keep your cash flow healthy, without hitting you with extortionate fees and interest rates.
- Second guess business loans
In some cases, business loans are ideal. Yet in most cases, there could be a better option out there. The biggest turn off is the fact that in the long run, the hidden costs and high interest rates associated with business loans mean you can end up paying far more than you initially borrowed. Fast-growing SMEs also find it hard to predict their exact cash needs, which means it’s easy to borrow more than you actually need. You’re then stuck paying fixed interest on money that isn’t being used.
So what are the alternatives?
We know what not to do. But what about the right way to approach business funding? Cue alternative financing. Designed to offer SMEs superlative flexibility, alternative financing puts entrepreneurs back in control of their cash.
- Factoring at the forefront
Factoring is one of the most popular ‘alt-fi’ solutions out there, and sees a business sell its accounts receivables (i.e. invoices) to a third party (the factor) for a small fee. This closes the gap between raising invoices and receiving payment, and allows SMEs to access the cash they’re owned, instantaneously. When it comes to total flexibility, select invoice financing solutions like GapCap are the way forward. The system allows SMEs to pick and choose what invoices to fund, as opposed to locking themselves into a blanket contract.
- Other alt-fi solutions
Crowd funding and peer lending are other popular alt-fi solutions, with stock finance and plant and machinery financing also encouraging entrepreneurs to look beyond the banks. In fact, the alternative funding market is gaining such momentum that NESTA estimates that it was worth a huge £3.2 billion in 2015.
So, while bank overdrafts and business loans may have tradition on their side, joining the alt-fi revolution will unlock incredible benefits for your SME. Rather than settle for rigid terms that exist largely to benefit the banks, alternative business funding allows you to secure as much, or as little cash as you need. You’re not forced to take more than you need, nor are you made to struggle when you want to borrow more cash. Thanks to the dynamic nature of alt-fi solutions, they easily adapt to your changing business requirements.
It’s smart finance, for next-generation entrepreneurs.