Money stuck with consumers due to non-payment means a poorly working capital situation, leading to regular debts to keep the company going. To prevent this, small business owners should make early payment policies transparent, promote early payments, and impose penalties for late payments.
Fremont, CA: While the concept behind the product or service is the first step in bringing the company to life, funding is an absolute necessity for it to continue to expand. However, this is an environment that is incredibly difficult for most SMEs, small businesses, and start-ups to manage.
Traditionally, business owners and businesses have often looked to banks and financial institutions to meet their loan requirements. However, following the subprime crisis of 2008, most financial institutions and banks have been subject to tight controls and must comply with strict regulations. This has certainly not benefited small companies, as the only ones whose lending applications the banks deem to be serious are those of large corporations.
This is understandable considering the regulatory structure with which the banks are supervised. They want to keep their risks low, and fund companies that can easily demonstrate continuous and stable cash flows and have enough collateral to back up their loans, something that the small business owner cannot promise.
Here are three financial challenges small businesses face when expanding their business:
Delayed payments from clients
This is one of the main problems most SMEs are facing. Money stuck with consumers due to non-payment means a poorly working capital situation, leading to regular debts to keep the company going. To prevent this, small business owners should make early payment policies transparent, promote early payments, and impose penalties for late payments.
Selecting the wrong funding option
Although it is difficult to obtain funding from banks and financial institutions, there are many other financing choices for small and medium-sized businesses to choose from, such as corporate loans, crowdfunding, bootstrapping, venture capital, angel money, or raising money from family and friends. Despite having so many choices, business owners frequently make the wrong call and raise money on the wrong platform. To make the right choice, it is necessary for business owners to determine, in the first place, why they need a loan, to have a clear understanding of their current financial situation, to define the risk profile for each of the financing options they have and, finally, to make a choice only after conducting thorough research on each option.
Not enough working capital
Small to medium-sized companies and small business owners require a minimum of 6 months of investment as working capital to concentrate on increasing their customer base, getting the word out, and delivering the goods and services they are selling. This labor capital requirement may be quite large for a small business to come up with itself. At the same time, the amount of working capital needed is too small for conventional banks and financial institutions to accept and underwrite, taking into account the costs and risks associated with such loans.
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