While many people shy away from financing, it’s actually an incredible tool for maximizing opportunities. It’s also an imperative aspect of business success. Not only can assessing and selecting financial alternatives improve your business significantly, but in dire times, it can actually save it from failing.
Reassessing financing is, without a doubt, a strategy that helped keep the successful businesses afloat. I suggest that in good and bad times alike, both successful and struggling companies assess their challenges and opportunities and review financial alternatives. Review your situation and consider whether any of the following alternatives may provide more potential. The more details you have of your program and needs, the easier it is to assess alternatives and avoid failure.
It was projected that 600,000 more businesses would fold as a result of the Pandemic. Surprisingly, and thankfully, that number was much lower (200,000 additional businesses actually closed). This reduced number was most likely due to a combination of factors: The government provided financing and services, companies learned to operate with less expenses and revenue, and the Pandemic impact was not as great as expected. In particular, companies learned to navigate the issues, were committed to success, got innovative with new methods, and considered financial alternatives.
Strategic Financial Alternatives
Not enough financing is obviously the greatest risk for failure. Additionally, not being equipped to develop alternatives to operate and succeed is also an obstacle. For example, starting a business will almost always require more time, more resources, and more expenses than expected. Marketing, equipment, sales force, materials, patents, and administrative expenses are a few examples that are frequently underfunded or forgotten altogether.
However, acquiring too much funding can also create significant costs and risk. Remember, you have to provide a return for both financing and your activities. You don’t want to feel so flush that you spend without careful evaluation. Getting equity investors can also be very expensive. For example, consider raising $200,000 in equity for a business that will achieve $2 million in sales and $400,000 profit in a short period. If you give up 20% of the equity, which is quite common, your cost of capital is 40% with no tax deduction. Even credit cards are cheaper.
Additionally, your specific situation and how much risk you take are both key factors that affect how you assess financial alternatives. The question my clients are frequently unprepared to answer is, “How will you support yourself while the business has little or no cash flow?” While investors worry about this issue, it is seldom in formal reports or plans.
For the most part, we still live in a world with an old system of small business financing. Most financing (including institutions like banks and the SBA) is based on antiquated businesses, such as manufacturing and retailing, where financing was handled mostly through asset loans, guaranteeing debt via family assets, and personal savings.
However, things are very different today. Most new businesses are service or technology-based, and require much less investment. Some of the biggest changes that need to take place involve utilizing alternative techniques to minimize financing needs and capitalize on marketing opportunities to accelerate growth. I recommend a more comprehensive and flexible approach to the process which focuses on key issues like: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you? What is the potential for failure and success?
A major favorable factor is that we live in an environment with low interest and inflation rates and lots of capital to invest. You should consider some financing suggestions that take into consideration new trends and current events. For example, the government has instituted $2 trillion of relief programs for salary, unemployment, and investment that must be considered. You should also consider investing more of your own portfolio in equities than bonds which have poorly performed with low interest rates .
In 2008, Malcolm Gladwell published, Outliers, which argued that many extremely successful people have abnormal life experiences. He was followed by authors like Daniel Pink, Adam Grant, and Steven Levitt who similarly argued that non-traditional individuals achieve the most success. Gates, Jobs, Musk, and Bezos are among the examples today.
Thus, pursuing more risk in order achieve great growth has become a popular mantra in developing alternatives. This is supported by the recent Forbes survey of almost 3,000 billionaires. They hold $13 trillion of wealth (a 60% increase during 2020, despite a pandemic and economic decline). There are 660 more billionaires than last year (a 30% growth). Thus, the hockey stick approach to growth (accelerating growth beyond normal ranges), which was a red flag a few years ago, is almost a requirement to attract venture capital.
Alternative Financing Sources to Consider
Fintech lenders employ the latest financial technologies to streamline the traditional out-of-date and non-transparent lending process. Not only has fintech given lenders the power to speed up their approval / payment processing times and de-mystify their policies, it has also given lenders the ability to offer personalized experiences based on each loan and mortgage seeker’s needs. Some of the leading commercial firms include Open Lending, Blend, and On Deck.
If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
A relatively new approach to financing is to ignore traditional principles because 90% of new businesses fail anyway. In his famous book, Lean Startup, Eric Ries argues that you need faster, more trial-and-error approaches that focus on management and customer wants rather than just great ideas. Specifically, he and others argue that you should develop, test, and adapt small programs before rolling out and looking for huge financing.
Consider non-traditional Sources of Capital. Crowdfunding allows small investors to back your business through public benefit corporations like Kickstarter. While credit card interest can accrue (at a high rate) if not paid off right away, some credit cards do offer a 30-day free program, or zero interest (sometimes up to 18 months) with a new account. Bartering, alliances, and exchanges are also viable methods to get both excellent services and save cash. Additionally, community-based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs.
Operational Financial Alternatives
The simplest way to achieve funding goals is to reduce the need for funds through regular business tactics. This can be accomplished with strategies such as outsourcing, contracting services, using the cloud, utilizing sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have the most potential to save cash: Inventory management, direct shipping including the use of Amazon, and sharing resources can be fast, effective ways to reduce financing needs.
Expand Marketing Efforts. Don’t wait for business to come to you. Consider the rule: you have to spend money to make money. Analytics, Internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster. In particular, don’t underestimate the potential of efforts like a simple website, selling on Amazon, paid search, and Networking, Networking, Networking! The best aspect of these tactics is that they can frequently be tested and measured with minimum investment. Kill or modify the ones that fail and expand the ones that succeed.
Significant changes are occurring in financing. There will be more risk, more volatility, more uncertainty, and more focus on profit and cash flow. Thankfully, there are numerous tactics to manage these shifts. As these changes progress, consider assessing and including more financial alternatives. Some especially useful methods include cost reduction, analyzing goals and strategies, and focusing on the dynamics of the financing rather than how much money you can raise. When all is said and done, there’s an abundance of financial alternatives, but are you ready and dedicated to implementing new winning strategies?
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