By Daniel Steyskal, Trapezoid Business Services
The odd thing about business financing is the more money you are looking for, the easier it is to obtain. It's been a long time since banks did actual business loans, instead offering SBA products and lines of credit. Why this has happened is a topic for someone directly involved in that industry, but small business owners need capital to get through tough times or invest in expansion to get to the good times. Following are five ways you can do that.
Personally, I hate crowdfunding for businesses. It rewards bad ideas with good marketing with no risk for the fundee. However, it works, and I couldn't tell a client to walk away from free money. A typical campaign consists of a project, a reward structure, and a social marketing campaign promoting it. While most campaigns are for creative projects or paying an emergency health bill, countless restaurants have gotten initial funding or a capital injection by posting a campaign. Some don’t even offer rewards! Take a moment to search “restaurant” on your favorite crowdfunding site and you’ll see businesses making good use of this platform for not only funding, but marketing. The downside is this can be time intensive to develop the media campaign and provide updates, but beyond rewards there is no cost to the campaigner. While the site takes a cut, you don’t have to pay back the money or have it effect credit.
MCA's are quick, easy, and will kill your business if used poorly. At an annualized rate, these funding vehicles have 75 percent to 300 percent interest rates, but that fact is obscured by the short payback period and how final payback amounts are calculated. While I rarely advise clients to use these tools, there are situations that warrant their use. One is in an emergency, but the fundee (never borrower because if these were loans, they’d be subject to usury laws) must be careful to ensure they can pay the funding back on the exact schedule advised, as these companies will seize your assets and charge extra for doing so. The other situation, the only one where I would advise these products, is to fund a highly-profitable project with short-term returns. When costs amount to 30 to 40 percent of a project it makes sense to pay $14,000 to borrow $10,000 and make $30,000, but far too often I see clients being funded, again never borrowing, for projects with slim margins and all profits go to the funder — and sometimes the project generates negative profits with the rates being charged. Be very careful with the products, but they are worth considering.
(Note, I do not work for American Express, but I would like to endorse American Express Merchant Financing as a top of the line provider of MCA products. I have used their service and received a very reasonable rate. I will use it again and would encourage anyone seeking to do the same)
Not a way to make payroll, but a good way to get a shot in the arm during a downturn or slow season. Whatever flavor of deal sites you prefer, these rarely attract new customers when used as advertised — they only attract customers looking for a deal. I'm guilty of this where there is a restaurant in my neighborhood that makes some great food at a decent price, when it's 40 percent off. Standard menu prices are way off for the area and constantly running half off deals is not a way to correct. However, there is an extremely effective way to use deal websites to generate quick revenue and some solid marketing and that is by having a deal for an event. Whether it is a private party, off menu tasting, or a full-on festival with music and vendors, using a deal site to promote something not normally sold will get immediate exposure and revenue, but not alienate existing customers or attract deal seekers who will fly off to the next coupon.
I cannot tell you how many “hard money lenders” were just brokers trying to sell porky pies. A real hard money lender has the capital, but also the knowledge and experience to use it effectively. These lenders will demand a personal guarantee immune to discharge, an interest in the business and some I know want a property deed attached. Like an MCA, make sure you can actually afford this funding, as you don’t want to be working to make your lender rich. If you find a good one, that professional is invaluable, but they are rare and are increasingly going toward MCA style products rather than traditional loans.
Are you a member of a credit union? Even if you do not need financing join one. These institutions provide amazing benefits for members and are well worth the fees. Credit unions give loans like banks used to. Traditional loans — not lines of credit, MCA's, or other high-profit products that squeeze a small business hard. These organizations are strictly members only, so join well before you have a need for funds.
I consistently use MCA style products and a generous line of credit from my credit union to get projects done. It’s impossible to get things done without some form of leverage and, until the banking system starts making sense again, small businesses will have to use non-traditional sources of funding. No matter what you choose to use, be sure you can afford the payback terms or commitment to provide rewards on a deal or crowdfunding site, or you’ll have to consider closing the business or working to ensure your funder is the only one making money.
About The Author
Trapezoid Business Services is solely owned and operated by Daniel Steyskal. Daniel has been a POS provider and business solutions consultant since 2008 working with small to midsized businesses and national franchises. When he's not making the impossible possible for his clients, Daniel enjoys cooking, gaming, and volunteering in his community. Find out more at www.tpzbusiness.com.