As the US economy improves, interest rates will likely edge up over time. And while the Fed’s decision this week to keep rates on hold was expected, December’s move upwards signaled a higher interest rate environment is on the horizon.
For small business owners it means locking in your capital sources sooner rather than later so when you require extra cash flow you have a facility ready to tap into.
Here are 5 funding methods to consider:
- Factoring of receivables – Factoring is when a business receives cash in exchange for the legal right to monies owed to it from a sale, its accounts receivable. In businesses that typically have long receivable terms, such as clothing, this arrangement allows the business to receive cash more quickly than it otherwise would. Cash received from factoring comes at a discount to your invoice amount, so businesses should make sure they have enough gross margin to absorb the cost.
- Pre-selling of goods or services – You commonly see this type of financing in crowdfunding campaigns, or in projects that will require significant resources to deliver. This method of receiving cash is when a business requests payment up front, prior to delivery of products or services. These funds can help the business execute on the customer deliverable without taking on any explicit financing costs. It also means you’re not selling equity which is a good thing. However, they sit on the company’s books as a liability to the customer until the product or service is delivered. Establishing clear and upfront terms can make this a win-win for both customers and businesses.
- Traditional lending – Banks may be willing to lend small businesses money, but they typically require three years worth of financial statements and that the business have tangible assets that can help repay the loan, in the event of a default. In contrast, credit cards may have minimal requirements but come at a higher price. These sources of capital are right for some businesses but out of reach for others.
- Alternative lending – Companies such as Funding Circle, Kabbage and Dealstruck offer private investments to small businesses without the regulations and requirements typically required of banks. These sources of cash can serve as a financial springboard to take a business to the next level but there are usually a range of costs involved, and rates can be higher than traditional lending vehicles.
- Equity investments – Savvy investors know to diversify their portfolios. Small business owners may have a significant concentration of their wealth tied up in their venture. Equity investments can not only help the owner ‘take some chips off the table’ and diversify a personal portfolio, they can also create strategic relationships and expertise that fuel growth for the business. However, there should always be a primary reason other than money when deciding on your equity partner.
When determining how to fund your operations, it’s important to remember not to take on too much risk. You want to ensure you don’t overextend yourself in the quest for capital. This includes formulating a disciplined repayment plan that’s based on actual data and realistic expectations.
Having up-to-date financials will help give you a clearer picture of where your business is and what it needs. It will also help inform your decision on debt or equity facilities.
The post 5 ways to fund a small business when interest rates rise appeared first on Xero Blog.