How does small business funding today compare to that of 10 years ago? "Thanks to the Internet, so much has changed and yet, so much hasn't," says Stephen Perl, the CFO of PMF Bancorp (USA).
Here are some of Perl's insights into the current financial landscape for small business owners:
Better Access to Small Loans Through Fintech
The biggest change for small business funding has been the emergence of fintech, online companies that handle financial services like lending. "Fintech has created nearly unlimited capital for small loans, loans of less than $100,000," says Perl. Small businesses can qualify for these loans more easily than bank loans. However, Perl points out that online loans charge higher interest rates.
Traditional Lending Remains Difficult
"If anything, it has gotten harder for small business owners to qualify for a bank loan," says Perl. "Banks tightened up their standards after the 2008 financial crisis." This presents a significant hurdle for small business owners, because banks are still the only real source of large loans, or loans of over $200,000.
If you want a bank loan, you should expect to go through a tough application process in which you will need to submit your company's financial statements, tax returns and credit report.
Factoring Has Improved
Factoring receivables is a process in which you sell your client invoices to a financial company so that you can get paid more quickly. The continued rise of the Internet and mobile has made it much easier for small business owners to use factoring. Now, you can easily find factoring companies online. Furthermore, these companies have streamlined their approval process, so it's easier than ever for business owners to qualify.
"Factoring is a nice mix of fintech and bank lending," says Perl. "Business owners can qualify quickly and at the same time can access much larger amounts of money, millions if they have enough in invoices."
Crowdfunding Is Not a Significant Source of Small Business Funding
Though crowdfunding became majorly popular this decade, Perl does not see it as a viable source of small business funding. "Kickstarter campaigns only work if you have a unique idea that really catches the internet's attention," he says. "People don't donate to normal small businesses."
Perl also believes that small businesses struggle to attract investors through crowdfunding. "Investors are usually reluctant to buy into small businesses, especially if they do not know the owner personally. Small businesses have too high a failure rate, so investors look elsewhere."
Overall, Perl argues that crowdfunding does not make up a substantial amount of small business financing. Instead, "The vast majority of small business funding, over 90 percent, comes from fintech, bank loans and factoring," he says. "You also see investors who are friends, family members or business acquaintances of the business owner."
Small business financing has improved over the last 10 years, but there are still some definite challenges. By keeping Perl's advice in mind, you can devise a powerful funding strategy for your company.
Read Stephen Perl's six-part series about small business financing here
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