Small business growing pains: 6 common financial challenges

Starting a small business is challenging and overwhelming.

A Bureau of Labor Statistics* report shows, on average, 20% of businesses don't make it past the first year, and 32% of businesses don't make it past the second year.

While many small businesses experience growing pains, financial challenges can make or break your success. Here are common financial challenges, plus a few options to overcome them.

Credit concerns

Many banks and traditional lenders will only lend to businesses with established credit histories and favorable credit ratings; plus, they will often consider the business owner's personal credit history. Requirements include a business credit history of one year or more and personal credit history of three years.

Additionally, they will look for good credit scores for both the owner and the business. A good personal credit score is considered a FICO score of 670 or higher.

Access to working capital

Having access to working capital can be one of the biggest challenges for small businesses. Many small business owners are only aware of the traditional options, such as bank lines of credit, which are challenging to obtain without the proper history, credit scores and if you have had a bad year.

It is essential to look beyond the traditional avenues to options geared toward new and growing small businesses, thus not including some of the same obstacles, such as accounts receivable financing (factoring), purchase order financing and equipment financing.

Accounts receivable financing companies will purchase your unpaid accounts receivables. Factoring improves your cash flow by allowing you to get paid quickly, eliminating the 30-plus days wait for payment while looking at your customers' creditworthiness, not yours. Furthermore, they often provide additional services such as credit checks on your customers.

Purchase order financing allows your business to purchase inventory from vendors without drawing on your line of credit. Additionally, it is off-balance-sheet financing, replacing equity investment and extending your working capital. Additionally, before the product ships, the purchase order financing company will arrange for the inspection of the finished products.

Machine and equipment financing enables a company to obtain financing or refinancing based on the value of their machinery and equipment.

Managing invoices, collections

It is often the nature of small businesses to have people wearing several hats. With that in mind, once your business starts to grow, you may be faced with the question of what to do with certain tasks so you can focus on growing and investing in your business.

One option is to hire someone to manage them. However, there can be many challenges that arise from expanding your staff including the cost associated with the new employee and the possibility of employee turnover.

If you decide to look for additional options, fortunately, there are other ways to accomplish these tasks. One option is to hire a company that specializes in back-office support for small businesses. You might even find one that specializes in businesses like yours.

Additionally, companies such as factoring companies handle tasks for you in addition to providing your business with working capital, this option could end up efficiently solving two of your challenges at once.

Chasing payments

Chasing past due invoices is a pain. It takes you away from essential responsibilities that help grow your business. Given that, it could be beneficial to find an outside group with a proven track record of collecting payments.

Accounts receivable financing helped a toy company get access to working capital, manage invoicing, and chase payments.

Kaskey Kids was a young toy company when it found itself spread thin and lacking time. The owners knew they needed help with cash flow and collecting on invoices. They considered hiring someone to manage it for them, and then they found Franklin Capital's accounts receivable services.

“Working with Franklin Capital allowed us to focus on running and growing our business instead of managing our invoicing, chasing payments and worrying about cash flow. Through the years, they have been great with our customers to the point that they have paid more quickly than they would have if we had been handling the collections ourselves or hired someone internally to do it,” said Christy F. Kaskey, founder and CEO of Kaskey Kids Inc.

Funding new large orders

Accepting new large orders is key to growing your business. Unfortunately, taking on those orders can be challenging due to a lack of funds to fulfill the orders while you wait to be paid. Traditional financing can often be difficult or time consuming when faced with an opportunity you don't want to turn down. Alternative financing such as purchase order financing and factoring were created for these situations. They could be an excellent option to quickly fill your cash flow gap.

Quick growth issues

Growth can bring additional costs, and when that happens quickly, the associated expenses can quickly outpace your working capital. If your finances won't catch up quickly enough or there is uncertainty about when you will be paid, you may need to consider options to bridge the gap. For example, accounts receivable financing will pay you immediately for your unpaid invoices.

Armed with the knowledge of all of your financing options, from traditional to non-traditional, your small business will be in an excellent position to navigate the many financial growing pains it may experience.

* https://www.bls.gov/bdm/us_age_naics_00_table7.txt

• Sue Duckett is executive vice president at Franklin Capital. Duckett has over 25 years of experience helping small to medium-sized companies grow by getting them access to the working capital they need. https://www.franklincapitalnetwork.com.