Introduction to SMB Financing

Sahnya is the CEO | Owner, and editor of the SMB content hub TexasOnTheGO.com.  She has been working in the online publishing business since 2003 and has written over 500 articles and presented at more than 100 SMB and Diversity events.

 

Introduction

Entrepreneurs need better access to capital to build, sustain and transform their communities.

Cash shortages occur for many reasons.

  1. Seasonal business cycles
  2. Run out of cash flow to maintain daily operation
  3. Looking for financial support to grow
  4. Lack of support and rejection from traditional financial institutions.

Any of the above may make you think your business will die due to all the challenges above and others not listed.  It is best for you to get prepared for any or all challenges, before any financial crisis may happen.

Cash flow for a company is the lifeblood of success. It is always best to have as many financial connections as one can get in case a financial crisis happens. The financial problems are even bigger and more vital for small business and start-ups.  Cash shortages for seasonal business cycles may require a 6-month investment to acquire product without being able to convert to revenue.  The risk of running out of enough cash to maintain daily operation, like payroll and daily expenses, is ongoing and looking for a source of financial support to grow the business are common financial challenges encountered by most small businesses and startups. Even though crucial to success or failure these needs are easily rejected by the traditional business banks due to high default risk.

Access to capital is one of the most difficult processes for entrepreneurs to gain a handle on in today’s non-standard innovative businesses, and yes, entrepreneurs and start-ups represent the ever-expanding and innovating backbone of our economy.

Traditional institutions, like banks, do not respond well to the needs of today’s entrepreneurs who often have very complex processes and no real brick and mortar assets.  Especially after the financial crisis of 2009, lenders became less flexible and access to capital became more difficult using traditional financing options.  Congressional action as a result of the 2009 financial crisis caused the whole traditional processes to become a loss-loss to both, companies/entrepreneurs and investors.   The lesson to learn from this is to know that there are now more options if somewhat less reliable ways to secure financing.  Using collateral to gain investors is not necessarily the only option to pursue.

Make use of any opportunity to connect with finance providers other than banks. One possible alternative is crowdfunding is a revolutionary way to solve the problem. Small business and startup could gain financial access from the seven certificated crowdfunding companies in Texas when they encounter financial challenges and get rejected from banks.

Next (New) Practices

In the traditional paper-driven a loan process it can take up to 6 months for entrepreneurs with projects and a proven operational track record to get financing.

For Startups the process is even more complex as they usually do not have the financial history to justify the risk for a traditional institution.  This is where a rich relative or an angel investor who will take a risk in order to make more profit than just investing in a traditional investment that might only bring 1.5% return, is great, but usually an exception.

What the online and venture capital business aims to do is to significantly reduce the time it takes to get short-term financing for a higher return on their investment.  In order to shorten the lifecycle, the growth of online financing using crowdfunding over the internet can accomplish this with capital raising campaigns ranging from 30 to 90 days, depending on the entrepreneur’s duration choice and return promises.

Required issuer criteria for many online crowdfunding projects will require identifiable track record in product monetization and a viable marketable project is still a priority.  It is also a viable solution for many entrepreneurs and startups that have a solid product or idea but will not qualify for a traditional loan. It can be a sweet deal and may gain you a long-term partner who has money and not the time or desire to run a startup.

Jumpstart Our Business Startups Act (JOBS Act)

The Jumpstart Our Business Startups Act is a law, signed in 2012, intended to encourage funding of small businesses by easing various security, investment regulations.  The legalization of equity crowdfunding enables individuals to invest in start-ups and small businesses in exchange for equity.  Until October 2014, only accredited investors were allowed to invest.  With the passing of Title III of the Jobs Act, the S.E.C. rules that anyone, accredited or not, can participate in crowdfunding.  The only stipulation is that an individual cannot invest more than $5,000 per year, per project.

The Small Business Administration is a government entity that has been tasked with helping small businesses find financing in both traditional and untraditional ways.  They sponsor many events paid and unpaid that help small businesses and investors to meet and determine compatibility as well as provide some assurances to both parties that the opportunities are real.

Remember that planning and being prepared with the knowledge to get help when you need it is crucial to being a successful entrepreneur.