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Financing Small Business and Startup Growth: Best Options and Practices

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Finding the right financial information online for your small business can be like trying to find a needle in a haystack. This case study was created in order to help you make an educated decision about what you need to do for your own SBE.

Background

My name is Natasha Lane and I am a small business growth consultant. My goal is to help small businesses thrive by providing the right information when it comes to finances. As far as I am concerned, you don’t have to choose between growth and stability, and this case study will demonstrate that.

 

The issues we faced

The most common problem most small and medium-sized businesses have to face at some point is insufficient cash flow. Our business was no exception. While we were pretty stable in the financial sense during the first year of operation and first half of the second year, our business underwent some dramatic changes after that initial period.

First, there was the fact that our revenue skyrocketed due to us taking on twice as many clients because our marketing campaign had finally started to show results. It turned out to be both a blessing and a curse.

Our revenue was bigger than ever, and while that is certainly a good thing, our small business’ cash flow level was at an all-time low. How was that possible with so many new orders and record-breaking revenue?

Well, it turns out that the increased demand for our product put an additional strain on our budget. We started to burn through our cash supplies in order to increase our production. We were growing rapidly, yet there was no money coming in since we weren’t able to effectively collect our accounts receivable. In other words, the amount we were spending on increased operation and production costs was greater than the amount we were collecting from our debtors.

We were forced to take a step back and analyze our financial situation before making a decision on what to do next.

 

The actions we took

Fortunately for us, cash flow problems are not uncommon among small businesses such as ours – in fact, cash flow is the main reason why most SBEs fold within the first few years. That meant that we had at our disposal plenty of financial instruments to solve our problem.

However, we had to choose carefully. Although the first stop is usually a bank, we discarded that option right away since the requirements for loans or credit lines are too strict and our chances were slim.

Our second option were small business lending marketplaces which are a popular choice with entrepreneurs and startups in the US. Online lenders have a clear advantage not just when it comes to lower rejection rates, but also when it comes to the application process, which takes less than half an hour. With traditional lenders, it takes over one day. Then you have to wait as much as three months for approval or rejection. Even if you get approved, you have to wait an additional 90 days in order to access the funds.

We decided on a small business loan from a digital lender because it would allow us not just to mitigate our cash flow problem, but also to hire additional staff. We really needed to take that step in order to ease the pressure that our existing employees were experiencing.

Our loan was approved in a few days. We were able to access the funds within 24 hours, which allowed us to act fast and bridge a huge gap in our cash flow, buy time to collect our accounts receivable and keep our production running smoothly. We also have to mention that the most time-consuming aspect of getting a loan was actually picking an online lender which offered the lowest interest rate. We advise anyone to do the same.

 

Positive outcomes

We were also able to maintain our growth throughout the process, which allowed us to pay back our loan with relative ease. Another positive aspect of getting a loan is the fact that we were able to grow our staff, which not only prevented our employees from burning out, but it also allowed us to increase our production even further. With our growing reputation and more people on our team, we were in a position to go after bigger clients and start developing additional products.

We have also been able to improve our invoicing, as well as to pursue clients which made advanced payments, which meant that cash flow would not be an issue in the future. With revenue that is bigger than ever and more people on staff, we’re planning to move into a larger, more suitable office space, as well as to invest into new equipment.

 

Negative outcomes

There were no real negative outcomes since our main issue was cash flow and that was fixed relatively quickly. But, even though the loan we took out helped us, it’s still a form of debt. We were putting our small business at risk because in case we weren't able to pay back the loan we would have to close shop altogether. Our employees were under tremendous pressure for a certain period of time, and if they wanted to leave, we had no way of stopping them since we weren’t able to give them a bonus at the time. Fortunately, that didn’t happen, but that sort of risk is very real.

Lessons learnt

All things considered, we’ve made the right choice when it comes to financing our small business. It turned out to be a success story despite all the cash flow obstacles. However, we have learned a valuable lesson. Our process for collecting our accounts receivable was inefficient so we needed to take care of that if we wanted to evade even bigger problems in the future. The situation also forced us to direct our funds to where they were really needed at the time: our staff and production. Above all else, it prepared us for the next stage of growth and taught us what we need to do to keep our finances in check.

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Page last edited Jun 11, 2019

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