Funding a business – Plenty of choices, no clear winners
- Navin Maganti
- January 19, 2017
In my research of funding and growing a business, I came across a report by the Federal Reserve Bank of Cleveland, called “New Insights on Online Lender Applicants from the Small Business Credit Survey”.
The results are quite interesting; applicants to online lending platforms had lower levels of satisfaction even when approved primarily due to the following.
Whereas applicants are challenged with traditional lenders such as banks for other reasons such as:
Let us take a minute to address how the market has arrived here- traditionally businesses have had to turn to banks – local or national to finance their business; however, since the financial recession of 2007 the process and requirements to get funding continues to be challenging.
The difficulty in accessing capital and historic low interest rates has allowed the online lending marketplace to thrive. However, for the 1st time in a decade interest rates trend upwards, we already have seen the online lending vendors and platforms raising their rates.
So how do small businesses handle their funding needs in 2017? Irrespective of the lender type and your experience, some of the questions that small businesses have to answer in an attempt to fund their business will not change. These major considerations can be grouped into the following:
- Credit Score: When you are a small business there is nothing more than the credit score of the principals involved in the business that establishes the ability of the business to raise funds. This is true whether it is a local bank or an online lending market place.
There are lenders who are developing offerings that include other data points to assess your credit worthiness, but the credit score is still the primary driver. The difference between an average and good score could mean a couple of 100$ a month in debt servicing. Therefore it is important to maintain a good credit score.
- Assets: Most small business or new business funding is collateralized. There are new forms of lending such as partially secured funding, or non-secure loans but these have their own drawbacks such as prepayment penalties, higher interest rates or non-flexible payment terms. Asset backed funding at personal or the business level is the easier and proven way to secure funds. Hence it is key that small businesses focus on building assets that can be applied to secure funding for their business.
- Revenue: As you know before any lending takes place the lenders would like to understand existing revenue or the path to revenue. This obviously determines the amount that can be lent to the business. Therefore it is important to focus on generating predictable revenue and cash flow to service the funds borrowed. Obviously any inconsistencies in repayment will affect the future ability of the business to receive funding.
The market for small business funding continues with the bigger financial players entering the market both in the form of personal unsecured lending e.g. Goldman Sachs as well as small business. It is important for small business to balance the ability of working with their local banks while focusing on the online lending market as they continue to vie for your business.