According to the US Small Business Administration (SBA), the past few years have been difficult times for the 32.5 million small businesses in the US. They faced major challenges such as the COVID-19 pandemic, labor shortages and rising inflation. These companies, which account for 43.5% of gross domestic product, are also facing a credit crunch.
The Associated Press reported in April that banks had been less generous with credit. In 2019, about 50% of the companies received the entire requested loan amount. But in 2021 it was 30% — a steep decline.
Minority-owned and women-owned businesses also feel they have a big hill to climb when it comes to credit. For example, Black-owned businesses feel they are less likely to receive the full amount of funding requested. For women, a Bank of America study found that 60% of female business owners felt they did not have the same access to finance as male entrepreneurs.
In this challenging environment, more and more business owners are looking at how to improve their cash flow, from traditional sources to new alternatives.
Traditional sources of capital
To fund their business ventures, business owners have typically turned to their personal savings or family and friends. That being said, bank loans remain a good option due to their relatively low interest rates. But these loans are becoming increasingly difficult to secure. Another problem is that many banks require several years of financial documentation, which emerging companies may not be able to provide.
Loan financing also comes with conditions such as: B. Administrative bureaucracy, limitations, delays in receiving actual funds and shorter coverage periods.
Another “traditional” route is asset-based lending, which requires collateral. This type of capital has its own disadvantages, including significantly higher management costs and higher interest rates over time. Also, lenders prefer liquid assets like stocks, which many business owners may not have.
A third option is factoring programs, where companies sell their unpaid invoices for immediate working capital. Disadvantages include lack of control and higher costs compared to regular loans. Another point of criticism is the stigma – factoring can signal potential liquidity problems to customers.
Alternative funding sources
Many business owners have now turned to alternatives such as online lenders and crowdfunding.
Companies with a new product have turned to crowdfunding sites like Kickstarter and Indiegogo. But there can be pitfalls. Creating a campaign that will go viral and attract supporters is not guaranteed.
Online lending platforms are another attractive form of financing, but while cash flow may be instant compared to traditional banks, these online lending come with higher interest rates and high late-delay fees. A cursory look at online lenders shows APRs of 10% or higher. Traditional bank loans are 3% to 7%.
New solutions for financing and cash flow management
For business owners who find the downsides of traditional financing overwhelming or are wary of alternative methods, there is another avenue to consider when managing cash flow. Increasingly, non-banks are integrating bank-like services into their technology platforms, a concept known as embedded finance. These banking-like services can include payments, bill processing, and lending. Benefits of embedded financing such as Plaid or Apple Pay are transparency, simple transactions, the collection of relevant customer data and offer companies an additional source of income.
Business owners considering this as a solution should consider speed and ease of payments, cost, and other benefits when deciding between platforms. For example, C2FO, a fintech software company, offers an integrated and secure platform that allows businesses to expedite the payment of bills and offer a discount to customers who pay early.
One benefit of this platform is improved cash flow, which gives businesses the ability to determine the best timing and terms for withdrawals. Business owners who work with C2FO also bypass the red tape and costs of traditional and alternative financing avenues.
As a further solution, C2FO now offers the C2FO CashFlow+TM Card, a new card that extends C2FO’s established early payment system. The process is as follows: business owners choose which invoices to accelerate and early payments are sent to the CashFlow+ Card.
The difference from the typical early payment is that there is no discount when using the card to secure the early payment. Businesses get paid early and in full and can then use the card, which also offers 1% cashback on purchases. Business owners are rewarded for being paid now so they can expand, transform and innovate – a different approach than more traditional and alternative means of raising capital.