Alternative Financing Pitfalls Business Owners Must Be Careful With
Get the Financing Your Company Needs Without Putting Your Company at Risk
Entrepreneurship is among the leading ways you can use to gain self-employment, financial stability and expand on your investments. However, before success is achieved, there may be financial challenges that you have to overcome especially during the startup phase. This phase is the most difficult and many successful business owners went through them, conquered and now you read about them in business success journals.
The major challenge to almost every entrepreneur is financing. This is the lifeline where every business thrives in. If you have strong financial strength at the start, count yourself fortunate since most startups find it difficult to access capital. The idea may be there but pushing the idea without business funding becomes a challenge and you have to overcome it.
Different sources of business capital do exist in the marketplace unlike in the past when the only source for business financing was traditional bank loans. The business lending space has evolved.
and brought about many different programs to maximize lending opportunities. Apart from traditional bank loans, there is crowdfunding, equity financing, angel investors, merchant cash advances, venture capital financing, online loans, lease companies, debt financing and factoring to name a few.
All these alternative business financing options can help business owners reach their destiny. However, they also have cons which may water down your investment efforts and leave you with nothing at the end. Therefore you have to be very cautious with these business financing sources. Below is some insight of alternative financing pitfalls every business owner should be cautious of before making their choice.
Losing Control of Your Business
How would you feel when someone provides capital for your business and eventually ends up controlling every operation that goes on in the company? It's something that most startups might face in the course of pursuing their entrepreneurship dreams. For instance, if an angel investor invests in your company by providing capital, what he or she expects is huge returns on the investment. This is the key reason why investors sacrifice cash and put your idea into reality. However, the higher expectation on returns may not work which may lead to a harsh reality to the business owner.
The point is, an angel investor wants his or her money back, and you may lose control of the operation of the business.
It is also good to note that venture capital funding also runs a huge risk of losing ownership of your company. If you see angel investors and venture capital funding as a way of getting your business idea into reality, you better ensure that the business is lucrative enough to avoid any possible loss of control of your business.
No Future Support for Your Business
As entrepreneurs, you need to have a business back up source of income in case the cash flow becomes a crisis in the near future. It's best to establish access to credit at the startup and continue to grow that funding ability that you can always rely on whenever you need cash. Therefore, it is very key for you to look for a financing resource who will always be there for you in case of anything happens. The rapport built between you and your lending source is essential. Not setting this up is the mistake that many startups commit when venturing into entrepreneurship.
Most angel investors and venture capital financiers take a big risk in funding startup businesses. Once they recover their money, there is little probability that they will make any follow up on further investments in your company unless there is high potential to make the most returns for them. If not, once one gets back their capital, they would be gone for good. This means that dealing with angel investors and venture capitalists is a win-win situation for both the entrepreneur as well as to the investor though the future will highly depend on the outcome of the very first investment.
Giving Away Too Much of Your Business
As a startup entrepreneur, the major hurdle that you have to overcome is the financial aspect. Once you are able to obtain business financing, you can now move on and push for growth and expansion of the venture. Too many new entrepreneurs, what they think of is if only they could get any source of capital but to a few, all they want is the right source of capital. The right source means getting yourself funded and at the end of the investor’s period, your business is left booming and bringing in huge returns.
Unfortunately, this does not happen to all alternative sources of financing.
For Instance, if you have to use crowdfunding, there is the aspect of giving back rewards and rewards to your financiers. Getting these reward calculations wrong may prove damaging and in the end leave you with nothing within your business. You may end up giving away too much instead of retaining it in the business. The same applies to merchant cash advance type of financing whereby you may also end up receiving very less from the sales since most of it will be directly be taken away by the merchant cash advance company.
To avoid this situation, you have to pen down a business agreement that spells out clearly how the investor will get back their money even if it would take longer than usual for them to get it back.
Bad Reputation for Your Business
Running a successful business does not only depend on the internal environment but as well as the external one. The latter refers to how the business relates with the vendors, investors, clients and even the law. This is what forms the reputation of your business. If an entrepreneur is not careful, one may ruin the reputation of the business before it even gets started. This can happen though it highly depends on the method one has chosen to look for capital so as to make the business idea materialize.
If you choose to use crowdfunding as a way to get your financing for your enterprise, then you better package yourself well! This is because crowdfunding can either make or break your business reputation. Running a crowdfunding campaign that in the end turns out to be unsuccessful can really be damaging to your business reputation. People who would have pledged to you after hearing that the project has failed will automatically take their money back. No one will have faith in you on that platform unless you change your tactics and move to another platform.
All in all, the reputation cannot remain the same. This means that if you have to use crowdfunding, you just have to plan for a successful crowdfunding campaign.
Most small business financiers have the tendency to restrict entrepreneurs when it comes to running the business itself. They put their interest first which is to recover their money instead of focusing on how to expand the business. This can be so limiting to the financier since they are not in a position to execute what they feel can improve the business. For instance, if one decides to use a merchant cash advance, the company could restrict you from getting cash payments from sales. This is a restriction which may affect the business adversely in a negative manner.
Most of the customers who prefer using cash might be locked out which in the long term could lead to a loss of income which could have improved the business.
One of the major limiting sources of finance for a business is a merchant cash advance (MCA). Usually, MCAs do limit business owners from using any other type of sales apart from credit cards. This is a huge limitation to a business owner since they may end up losing most of the income that would have come in from other sources. Thus, it is advisable for any entrepreneur to cross examine what the MCA entails and try to renegotiate so that both parties are satisfied and the business equilibrium is in balance.
Limiting Business Progress
Generally, alternative sources of financing for businesses such as equity financing, angel investors and debt financing sound so good to the ears for someone who is looking for a source of capital. They can actually make your dreams realizable but they have their own setbacks which one is supposed to understand before they take the leap. With equity financing, the financier will have a share of the company while in debt financing, money or rather capital is given to you and an agreement is reached on when the debt will be paid.
A promissory note is used in the latter.
The worst thing that no entrepreneur wants in their business is the issue of having to consult with someone every time a decision regarding the business has to be made. This is because most of the times the whole process takes long and sometimes certain decision have to be made immediately. No business opportunity waits for any man. This mostly occurs in equity financing and angel investments whereby the financier has a share in the business. The slow decision making slows down the operations of the business and with time it could prove costly.
To avoid such, an entrepreneur should share powers with the external investor on how to run the operations of the enterprise and if decisions have to be made, little time should be used in consulting each other.
Consultation and Decision Making
At times in business, certain decisions need to be made so fast bearing in mind that time is money when it comes to entrepreneurship. Sometimes you don’t need to engage someone else whenever such situations arise. However, this is not always the way to go whenever you have a financier who in one way has control of the business. Certain business financiers such as equity financing and angel investors often have the control of the business and hence have to be consulted before any decision is arrived at.
The consultation and the decision making process is a major undoing to the business owner as it may
be time consuming and make him miss a lot of business opportunities. Thus, as a business owner who is seeking left and right, you may be very happy getting somebody who offers you capital but before you take the offer, look at the equity financier and their demands as well as the angel investor, you better
sit down and share who does what and when to avoid slowing down the business operation.
We all know that financing and in this case financial stability is one of the key elements that can make any business thrive. It makes things move with ease compared to times when there
is a cash flow crisis. Every business owner needs money to either start the business or expand the business. Alternative sources of financing are nowadays considered quicker and an easier way to inject money into a business.
The alternative choices have their own demerits and can lead to collapse of what could otherwise have been successful business entities. Before any business owner chooses the overwhelming different types of alternative business financing options that are available, you need to evaluate the pros and cons. Without doing so, alternative sources could prove costly in the long run. You have to be very cautious before you totally decide that a specific alternative source of capital will not impact your business in a negative manner.
The entire decision should be made depending on your business aspirations, if you have collateral or not as well as what type of goods you are dealing with. For instance, if you have inventory which you can use as collateral, it would be wiser to choose inventory financing as a source of capital rather than factoring. Look at what you have and what you need before you settle on any form of alternative source of capital for your business. When all this is done, you could be among the individuals who prospered by having these alternative sources.