Taking debt now does not mean it is forever

There has always been a lending or financing gap for start-ups and small businesses (companies in business under three years).  And, with banks still holding back on lending, this funding gap has really widened over the last two years.

However, there have also been many alternative financing companies that have stepped in to fill this gap. These companies, unlike banks, usually specialize in certain types of small business funding like accounts receivable factoring, business cash advances or equipment loans and leases.  While these products can be a little more expensive than traditional lenders who spread their overheads across many different product lines or have cheaper costs of funds, these products are usually the only viable option for many new, growing businesses, in both bad and good economies.

I hear entrepreneurs complain constantly about the rates of interest or the fees for these products.  And, I always respond the same way:

First, these products may seem expensive on the surface but they really are not that much more expensive than bank products when all costs are analyzed.  Banks also charge fees as well as high interest rates but also require intensive financial reporting.  Keep this in mind, these organizations compete against each other – thus their products, overall, are priced very competitively.  Further, if a bank turns your business down, that usually means your business offers more risk – more risk that these alternative financiers will expect to be compensated for.  Pay a little more now for what you need through these alternative sources or get nothing from the banks – the choice is yours.

Second, along the same lines, if the banks are turning you and your business down, what other options do you have to obtain capital for your growing business?  If the growth opportunity is worth taking on debt in the first place – then the business must do what it has to do to grasp these opportunities - now.  When these opportunities start paying off then think about ways of improving these facilities through re-finance or take out (getting a new loan or facility to pay off higher costs loans or facilities).

But, keep this in mind as well.  Many of these higher cost products are not meant to be long-term financing vehicles.  Thus, they should not last forever or be relied on for an extended period.  If you take the higher cost product now and leverage those funds into new business and company growth, in a very short time your business should be eligible for the other, cheaper financing products from your bank.  Think of these alternative financing options as a means to a result - result meaning your business success or as a way to fill this lending gap until your business is no longer affect by the gap.

Financing your business, other than through commercial property financing, is not like a residential (home) mortgage loans for 30 plus years or even like auto loans (usually 5 or more years).  These products should only be used for a very short-term period (under one year) to either get your business started, to take advantage of new opportunities for growth.  Thus, regardless if your pay them off quickly or re-finance them through other means when your business is strong – in either case – these financial options should not last forever.