Do you want to build a business that can weather anything the market throws at it?
Business owners dream of success over the long haul.
The reality…
Most businesses end up failing due to cash flow. Poor product or lack of customers are usually not the main problems.
It’s running out of cash when you need it most.
Diversifying your business financing solutions and investments is where to start building a resilient business.
Here’s how…
In This Guide:
- The Importance of Diversified Financing for Business Resilience
- The Core Business Financing Solutions Available to Business Owners
- Strategies for Building Your Own Financing Strategy
- The Mistakes Business Owners Make (When Securing Financing)
The Importance of Diversified Financing for Business Resilience
Building a business that will last means anticipating the unexpected.
Here’s the thing…
When your only funding source runs dry, revenue takes a hit. Opportunities vanish. Growth grinds to a halt.
The smartest business owners don’t put all their eggs in one financing basket. They have a range of business financing solutions and investments to cover them during thick and thin.
According to recent Federal Reserve data, 59% of small businesses sought financing to cover operating expenses. That’s just how important access to financing is.
Businesses do need cash to get up and running, operate on a day-to-day basis and to invest in expansion. Without that cash, many won’t last.
More than half of businesses shut down within five years. A lot of that can be attributed to not having any or enough funds. Building up your financing strategy with the help of a trusted business lender is one way to be more prepared for any circumstances. When things are tight, you know you can find a reliable place to help you find the necessary cash.
The takeaway? Don’t take diversification lightly. It’s vital for resilience.
The Core Business Financing Solutions Available to Business Owners
Business owners today have access to more business financing solutions than ever before.
The trick is to know which ones are a fit for your business. Here are the main ones…
Traditional Bank Loans
Business bank loans are a staple of the industry. As one of the most common forms of financing, they typically offer:
- Lower interest rates than alternative financing solutions
- Longer repayment periods
- Larger amounts of money to qualified borrowers
The downsides? Banks tend to be pickier, requiring good credit scores and collateral. The approval process can also be slow.
SBA Loans
Government-backed Small Business Administration (SBA) loans provide appealing terms to business owners.
Businesses that require a larger amount of financing and don’t want to pay the higher interest rates that private lenders demand often turn to these loans.
Lines of Credit
Business lines of credit work like a financial safety net.
Business owners only pay interest on the money they use. The rest of the available funds sit there in the bank. Business owners draw from the line when they have short-term needs or see a great opportunity that requires immediate funding.
Lines of credit are also very flexible. You can use them for a range of purposes and as many times as you need to (within the borrowing limits, of course).
Alternative Lending Options
Things in the financing landscape have changed in the past decade.
Online lenders now offer faster approval times and more flexible terms than traditional banks. These options include merchant cash advances, invoice factoring, peer-to-peer lending, and more.
These alternatives usually come at a higher cost, but they can open doors to capital when other options aren’t available.
Equipment Financing
Do you need new equipment but don’t want to burn a hole in your cash reserves?
Equipment financing is an option for buying machinery, vehicles or technology and spreading the payments over time. Equipment serves as collateral and the purchase is more easily approved than with an unsecured loan.
Strategies for Building Your Own Financing Strategy
It’s now time to get down to business…
Developing a well-rounded financing strategy is a process that takes some time and effort. It also requires relationship building.
Start With Assessment
Before you approach any lender, every business owner needs to understand their own financial position first. This includes:
- Current cash flow
- Existing debt and obligations
- Credit scores and history
- Asset inventory for potential collateral
Once you do that, you’ll better see which business financing solutions and investments are a good fit for your business.
Build Banking Relationships Early
One thing most business owners forget…
The best time to establish banking relationships is when the money isn’t needed yet. Banks work best with businesses they know. So it’s better to start small with an account and build from there to access larger financing in the future.
Mix Short-Term and Long-Term Options
A strong financing strategy always has a good mix of short- and long-term financing.
Short-term options like lines of credit are for immediate cash flow. The longer-term options like term loans are for major investments and expansion.
Mixing it up lets you have flexibility and not overextend your business.
Keep Personal and Business Finances Separate
Mixing personal and business finances causes nothing but trouble.
It’s harder to track expenses, file taxes and, potentially, get your business financing approved when lenders see your application.
Keeping the finances separate helps to maintain professionalism and clarity.
The Mistakes Business Owners Make (When Securing Financing)
Smart business owners make mistakes all the time. Here are the ones you want to be careful to avoid…
Waiting Too Long to Seek Financing
Desperation makes people do some crazy things.
Waiting until the business is completely out of cash makes business owners accept financing options they otherwise wouldn’t. Approaching financing before it becomes an urgent need can be much more comfortable and provides you with options you may otherwise miss.
Ignoring the Total Cost
Interest rates alone are not the only price you pay.
Hidden fees, penalties, and other charges can inflate the true cost of financing many times. Calculating the true cost of financing before signing the dotted line is a no-brainer.
Over-Leveraging
Debt can kill a business.
Financing is meant to enable growth, so don’t take on more than your business can handle. Underleveraging is better than overleveraging, especially when it comes to keeping debt manageable when things go sideways.
Neglecting Credit Health
Bad credit not only limits your options but also increases the financing cost.
Monitoring both your personal and business credit scores is essential to staying on top of your credit health. High credit scores open the door and secure lower rates. If there is a problem, catching it early will give you a chance to fix it before it gets worse.
Wrapping Things Up
Building a resilient business through diversified financing isn’t a nice-to-have anymore. It’s a must-have if you’re to survive and grow in these uncertain times.
A quick recap of the most important takeaways:
- Never have just a single source of financing
- Establish banking relationships as soon as you can
- Mix it up with short- and long-term financing options
- Be sure to calculate the regal cost of the financing you want to use
- Keep an eye on your credit so you have access to more options
Market conditions will change. Unexpected events are bound to happen. Businesses that already have multiple financing options at the ready will be able to weather the storms while their competitors are left struggling.
Start building that foundation of diverse financing today. It will only be worth it in the future when the future of the business is at stake.
