The Future of Financing

As technology changes lending trends, businesses will have more options than ever to raise capital.

According to government statistics, 28.8 million small businesses currently operate in the U.S., employing 57 million people. Sadly, only one-third of small companies make it past the two-year mark on average. A study by U.S. Bank notes the major reason these businesses fail is due to cash flow problems. Eighty-two percent of those businesses, in fact, are tanking because of lack of cash.

That’s an important statistic to keep in mind, considering the bulk of the promotional products industry is made up of small to mid-size businesses. So what can you do to make sure you stay afloat and out of the red? Much of the time, it comes down to financing. Whether you’re borrowing from a friend or your personal account, or applying for a loan or partnering with a venture capital firm, the majority of companies will need to finance at least something either in the early stages or somewhere throughout the years of business.

But funding and financing as a whole is changing as the business world becomes more technology driven. To understand where that fundamental part of business operations is headed, we first need to understand where we’ve been.

Current Climate
According to Catherine Graham, president of Canadian distributor Rightsleeve (asi/308922), what really makes the evolution of the financing space interesting is how it began in the first place.

“When you look at the pre-digital historical process that orders used to go through in this industry, you had a lot of time up front with production and proofing and art files,” she says. “The timeline of getting an order to completion was longer, and then once the order was actually completed, the time it took distributors to invoice a customer was longer as well. They may have been waiting on a supplier to send an invoice or something like that.”

The bottom line is everything took longer – but then something happened.

“You had this big expansion and the suppliers were requiring payment long before the customers were paying,” Graham says. “Overall, that’s what drove the original need for financing – the incredible length of time that everything used to take.”

Promo companies turned to banks for loans, or small-business grants, even to third-party investors, or they used personal savings and assets, leveraging homes and other property. Some asked friends for money to help fund whatever business needs were at the time.

Financing something wasn’t, and still isn’t, easy. It’s complicated and stressful, especially with banks not giving out as many small business loans as they used to.

“It’s a long process,” says Bill Korowitz, CEO of The Magnet Group (asi/68507) and a trained economist. “There’s a real tendency for people to get anxious and irritable. It’s a very up and down type of thing.”

But that process, although still the most traditionally used, is changing.

What’s Next
Clearly, order cycles are much shorter now and traditional funding is not as necessary as it once was.

“You have this compression happening across every stage along the way,” Graham says. “For example, 24-hour turn with orders, better systems allowing a distributor to invoice faster, and easier ways to accept payment up front. It’s enabling everything to move faster. The need for financing is not as great as it used to be as a result of the options available now to be able to turn everything faster.”

There may be more cash up front at this point, but that also means more advanced solutions to financing expenses are on the horizon. Now we’ve got online lending sites. We’ve got crowdfunding. We have technology-enhanced options making the process much easier, so business owners don’t have to worry about how much cash they have on hand to contribute to an expense.

“Crowdfunding is on the fringe,” says business financing expert and consultant Bill Seagraves of CatchFire Funding. “You read about it quite frequently, but to be honest with you, I’ve never had a client call up and say they’ve been able to get the capital they need through those sources. Crowdsource funding is likely a millennial-focused opportunity. And when that generation comes through, maybe it will bring along that concept.”

But, Seagraves says, it will take some regulation if someone plans to crowdfund a major business expense.

“Crowdsource is micro-commitment funding,” he says. “You’re trying to get micro-commitments from a lot of people for not very many dollars. Maybe the amounts are going to be small enough that you don’t have to worry about qualified investment status. But at some point in time, somebody’s going to get burned and the FTC is going to step in and say, ‘We need to regulate this,’ and they’re going to change the rules so the investor is protected.”

Korowitz and Graham note that crowdsourcing has potential, especially if the company seeking funds is smaller or if it’s a supplier looking to develop a new product or product line.

There’s also big growth in the online lending space, Graham says, allowing for a lot of flexibility and options to get bank-like financing for business needs. But she thinks the next huge financing shift will surround something completely different.

“I think a lot of the real changes are going to happen around digital currency,” she says. “Bitcoin or blockchain-enabled transactions, for example. The speed these digital options are enabling, and also what they might enable in terms of asset financing or other types of alternatives in that space, are going to bring a lot of change in the next few years.”

Lending Requirements
Although the ways businesses can get money are changing, don’t expect lending standards to be any easier. Korowitz and Seagraves both see the requirements needed to borrow money staying basically the same as they’ve always been.

“Document requirements won’t change,” Seagraves says. “To get a loan today, you need to have some vehicle to communicate your plan, and that vehicle should include a set of business projections, like an Excel spreadsheet that talks about your financial requirements for the short term and how long it’ll take to become cash flow-positive. Then the lender is going to want to know your financial position as an individual and if any of your assets can be leveraged to secure a loan. These are all very traditional requirements, and I don’t see them changing any time soon.”

Korowitz agrees, noting that having a personal story of business success from the past can play into the decision as well – as long as the borrower has the numbers to back that up.

“They want to know what you’ve done, what do you have, what are you going to do to allow me to make money on my money,” he says. “If you’re looking for real money, the requirements are probably not going to change much. It’s about: Are you growing your business, are you growing in profitability, and why or why not? I don’t think that changes. Even though our society and values are changing, businesses still run on fundamentals: sales and profit and loss.”

But on documentation and process, Graham has a bit of a different take. She’s seen a lot of changes on the personal lending side of the financing world, like consumer loan companies introducing quick-turn authorizations and streamlining the information collected. She expects that to hit the business world soon.

“The banks are coming under significant pressure to try and make their processes easier,” she says. “It’s going to be slower to come on the business side because there’s more complexity around being able to evaluate a business and being able to see any security that’s offered.”

Still, Graham believes digital trends will help quicken how application info is submitted and turned around – which should benefit smaller firms. “There’s an unbelievable amount of paperwork involved with any kind of banking transaction,” she says. “I think that as the pressure increases on the banks, the business side will be next to be hit.”

Finding Money Online

Although they usually offer higher interest rates than banks or credit unions, online lenders are another option businesses can consider when they need financing – especially quickly. Plus, with the glut of them comes competition – which over time should mean better terms, more flexibility and a more convenient process. These five sites are some of the best right now for acquiring business financing online.

Lending Club, Lending Club is best for businesses that need fast cash, offering between $5,000 and $300,000 in loans. Interest rates can get up to 35%, and borrowers can potentially take up to five years to pay back the loan. Qualifications: $75,000 minimum annual revenue, minimum credit score of 600, two or more years in business, no recent bankruptcies or liens, ownership of at least 20% of the business.

Funding Circle, Funding Circle is run by small-business owners who service other small-business owners. Loan amounts range from $25,000 to $500,000, and you have up to five years to pay it back. Interest rates start around 4.99%. Qualifications: Something to use as collateral, two or more years of income statements and bank records, a credit check, annual business revenue of $50,000 minimum.

Kabbage, Kabbage started in 2009 and has since loaned more than $750 million to small businesses. The site offers loans between $2,000 and $100,000, with interest rates that don’t kick in until you’re able to borrow from your own loan. Plus, there’s a mobile application. Qualifications: Minimum $50,000 annual revenue, one year or more in business, a credit check.

OnDeck, Approval from OnDeck only takes minutes through its website. From there, you can get a loan from $5,000 to $500,000. Interest rates start at about 10%. OnDeck has repayment periods of up to three years. Qualifications: One year or more in business, annual business revenue of $100,000 minimum, personal credit score at 500-plus.

SmartBiz, Borrowers from SmartBiz will enjoy larger loan amounts and lengthier repayment periods. You can borrow between $30,000 and $5 million, with up to 25 years to pay it back. Interest rates hover between 5.25% and 7.5%. Qualifications: Two-plus years in business, verified cash flow to cover payments, a U.S. citizen or permanent resident business owner, credit score of 650 or higher.