Female business owner calculating her profits on her laptop

How to Keep Your Business Funded in a Tightening Credit Market

Cash is king, but it can often be in short supply for businesses 

According to a recent study, over two-thirds of small and medium-sized businesses have been unable to access funding on more than one occasion. Due to this, 34% suffered cash flow issues, while another 34% could not launch a new product. For another third of businesses, retaining top talent became impossible.

While every business owner aims to be cash flow positive all the time, the reality is that this isn’t always possible or practical. Growth, even stability, sometimes requires extra cash. But the state of small business capital today is challenging for most business owners looking to tap into the tightening credit market. 

Why Access to Small Business Capital is Shrinking

Business funding isn't easy to come by these days, and obtaining traditional business financing will likely be more challenging within the next two-to-five years. There are a few reasons for this shift in credit availability:

Ballooning inflation 

Due to supply chain disruptions and the remnants of the pandemic, year-on-year inflation is skyrocketing. Inflation in Canada is at a new three-decade high at 6.7% as of March 2022.  And this is a global phenomenon as companies worldwide struggle to recover from disrupted supply chains and rigid shutdowns. 

As inflation remains high, everything costs more, and workers need more cash to make ends meet. As inflation rises, so do interest rates, making it more expensive than ever to get traditional funding from banks and traditional lenders, who are also tightening their requirements. 

To temper inflation, the Bank of Canada has raised rates already and is considering another hike. This affects your business financing options in the form of higher interest rates.

Rising credit rates

When the credit rates increase for banks and lenders, these increases are transferred to the consumer—small businesses and individuals. As a result, credit rates become unaffordable for many businesses, especially when banks require pristine credit scores or extensive proof of profitability. This bars startups and other traditionally "risky" businesses from tapping into business financing.

Less venture capitalist funding

Finally, stock market volatility and economic uncertainty have put pressure on venture debt specialists looking to reduce their risk and maximize returns. 

Over the past decade, venture capital firms had a more lax approach to equity financing, often offering grace periods or waiving cash-on-hand requirements. But in the near future, a potential investor might offer less cash with more strings attached to protect their investment.

How to Bootstrap During a Credit Market Crunch

In other words, access to traditional small business financing and start-up funding is shrinking fast. And a small business owner wanting to stay ahead of the curve should consider how credit options factor into their long-term business plan.

There are a few alternatives to bank loans and equity financing, depending on your business and situation.

Relying on personal funds

Taking money from your personal savings isn't ideal, but it's one of the first things you can do to plug a cash flow gap in an emergency, depending on your business size. However, you'll have two problems when your money runs out—keeping yourself and your business afloat.

Asking friends and family

About one in four business owners ask friends and family for funding. With a solid business plan and a clear repayment schedule, it's possible to make your loved ones feel more valued as potential investors. But failing to pay them back on time can create relationship stress.

Using the company credit card

Credit cards are the easiest ways to gain access to credit. However, poor credit management can devastate your credit score. And while it's good to have a business credit card on hand, low credit limits and high interest make credit cards make them an easily exhausted resource.

Reviewing alternative financing options

Finally, you can turn to alternative financing. There are many forms of financing, and not all are made equal. The process for alternative lenders is usually faster than the bank approval process, but finding the right type of funding and a trustworthy lender for your needs is critical. 

For example, if you work as a wholesaler, you may find purchase order financing useful for paying a supplier, but if you need to pay employees, you'll need another funding method. In this case, it helps to have an accountant who can explain the best financing options. Revenue-based financing is one option to consider.

Why Businesses are Choosing Revenue-Based Financing 

One of the most flexible types of financing is revenue-based or invoice financing, which enables businesses to get invoices paid ahead of typical 30, 60, or 90 day terms. Specifically, a small business owner sells their invoice to a lender and receives a cash advance. The small business's client pays the funding company according to the original terms, and once that is complete, the commitment is over. 

There are a few reasons why revenue-based financing help keeps businesses funded:

  • Fast funding: First off, as an alternative financing option, it's possible for a small business to get funding in days. Furthermore, the application process itself is significantly shorter than a traditional application. It usually takes 5 minutes if the lender has an online portal.
  • Flexibility: The business can request funding any time they need a capital boost. Additionally, this form of financing can be used for any business expense - from payroll to inventory to taking on big projects that will grow the business.
  • Low risk: There are a few reasons this form of small business funding has lower risk than a bank loan. Small businesses aren't locked into a long-time commitment after their customer pays the invoice. At the same time, the credit score of their clients matters more in getting approved than their own. And usually, the clients of small businesses who need financing are larger enterprise companies with potentially high credit scores and a long history of payment.
  • Easy to manage: With less paperwork than bank loans, fewer strings attached, upfront fees, and no collection worries, invoice financing is not just convenient, it's easy.

Keep Your Business Funded

Keeping your business funded is about two things: Planning and cash flow. Together with your trusted accountant, it's possible to find the best financing option for your business, when you need it. 

While working capital may be harder to come by in the next few years, it's possible to keep your cash flow positive. Alternative funding, particularly revenue-based financing, offers a structured avenue for a small business owner to find the financing they need to weather any economic condition, on their terms.

About FundThrough

FundThrough is a leading fintech company accelerating cash flow and enabling growth for small and medium businesses. Based in Toronto, FundThrough’s AI-powered invoice funding platform gives B2B businesses fast, customized funding offers to get their invoices paid in a few days - rather than a few months - and get quick access to cash that’s already theirs. For more information, go to http://www.fundthrough.com. To learn about FundThrough’s partnership with Intuit QuickBooks and how you can fund an invoice, click here. If you’re ready to create a free, QuickBooks integrated account, get started here

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