Looking up in a forest

Are you lost in the woods?

An interesting article in the Harvard Business Review called the “The Five Stages of Small Business Growth” talks about the most important aspects of building a small business.The authors point out that after you start finding clients and making income it all comes down to management.

Management, they continue, is the most prominent determination of success or failure. After doing some research, they found out that most businesses have the same eight problems:

  1. Finding financial resources
  2. Finding the right personnel
  3. Understanding how your business operates
  4. Business resources, customer relations, supplier and distributor relations.
  5. The owner’s goals for the business
  6. An owner’s ability to market, invent, and produce
  7. An owner’s ability to delegate responsibility to others and manage productivity
  8. A strategy that determines what your business is especially good at, and what you could do better.

The reality of the situation is that businesses need money. Without money or capital, a business can’t grow or expand. Clients end up finding new alternatives for their needs that are either cheaper or more readily available.

Highlighting the top seven ways that successful businesses find working capital:

#1: Factoring your Accounts Receivable

Factoring is probably one of the oldest and best options for small businesses to use to get money. Factors will give you 75 to 80 percent of your invoices immediately, and forward the rest of the payment (minus what you’re paying for the service) back to you when your customer pays you.

Factoring offers the fastest means of getting cash by giving businesses immediate access to funds that could have taken days to receive.

#2: Using Hedge-Funds

Hedge funds are not a resource for smaller businesses and best for bigger businesses and have the same concept as your run of the mill loan- except with a lot more risk. Hedge funds usually allow access to funds much slower than other methods and the loans can be risky.

#3: Peer-to-Peer Lending

These kinds of lenders can be family, friends, or interested strangers. These kinds of transactions are easier than possible through crowdfunding ventures like kickstarter.com or indiegogo.com. With these kinds of programs, the only fees that your business would have to pay would be the fees associated with running your campaign and pay taxes on what you earn. The benefits of these programs are obvious, but not a lot of money is made that way, contrary to what you might believe (only about $300 million annually) per year, according to these crowd-funding venues.

#4: Loans from your Customers

Generally for these types of loans to be effective, businesses should possess solid customer lists and establish customer trust- which can be very time-consuming. Farmers have used this technique to have customers prepay for a share of the harvest and also share in the risk.

#5: Using Credit Cards

Credit cards can be a great option if you’ve got good credit. You get easy access to cash, and usually enough to make a few moves, but there are a wide variety of drawbacks of using credit cards. Usually, credit cards have the highest amounts of interest, huge penalties, and the terms are subject to your credit score. Miss an important payment your credit line could fall.

#6: Convertible Debt Instruments

Convertible debt sounds like you’re riding off into the sunset- but you’d be wrong. These kinds of debt instruments require owners to give up a little bit of equity to qualify for a loan. This gives a lender equity into a business, making the loan a little less risky for the bank. Usually, lenders want to be paid back with a return, not an actual part of your company. The percentage is just to ensure payment if your bottom line fails to grow. Owners may have to pay back the debt that doesn’t convert into payments if the business is under-performing.

#7: Loans from Venture-Capital Companies

These days, some of the richest people in the world couldn’t be happier to give some of it away to you (for the right price of course). If you’ve got a killer idea and a plan to execute on that idea, then there are some big companies that would be interested.  Buyer beware- these options usually come with high-interest rates and stock warrant coverage requirements, both of which can be very expensive for small businesses.

Realistically, your financial means determine your ultimate utilization of resources

Your business’s choices on different loans and lenders might have to meet specific variables, including:

-Consideration of the timing of your loans

-Your credit history (the business or the individual)

-Your assets to back up the loan

-Your business’s geographic location

-The risks that your business has, as well as the realistic chance of success for your goods or service

In most situations, the best option is factoring. It releases your natural assets in a way that gives you more money instantly. Because your money is available instantly, A/R type factoring arrangements give your business abilities to operate with fewer complications and only a small fee. In many cases, these types of financing schemes are more reliable in situations when the bank says “no” but you still need your money.