“Liquidity” was a term little known to the non-financial world until two years ago when the Global Financial Crisis sucked the liquidity out of the world’s money markets.
For small businesses the crisis meant an end to cheap loans from banks, creating another crisis on its own. Small businesses rarely have a monetary buffer large enough to cushion against the inevitable hiccups that choke cash flow, most often a slow paying client for a large job. So how can small businesses get their hands on money without resorting to loan sharks?
The most tempting and easiest source of debt is to use credit cards. Banks and financial institutions are often criticised for luring customers with cheap credit cards with promises such as forgoing interest for a six or 12 month period. The obvious problem is that credit card interest rates can be exorbitant, over 20 percent in some cases. A firm can sink under the weight of spiralling interest payments so a credit card is a last resort.
One alternative is to turn to individual investors. Peer to peer lending has bloomed with several websites introducing lenders to borrowers without a bank as intermediary. Sites such as Prosper.com and Lending Club are a source of unsecured and secured loans.
Prosper.com considers itself to be “the eBay of loans”; potential borrowers write a request for a loan of up to US$25,000 and specify what it will be used for and the maximum interest rate they are willing to pay. Lenders can choose to fulfil the entire loan amount or part of it, and need only reveal their screen name. Loans are repaid over one, three or five years and there are no repayment penalties if you would like to pay it off earlier.
Friends and family are another source of funds. If you are concerned about souring important relationships, consider a site like Virgin Money. This website does not provide loans, only a mechanism and guidance for borrowers who have already found lenders.
Virgin Money deducts money automatically from the borrower’s account on agreed dates, and can arrange payment terms that would be difficult to negotiate with a bank. These include a delayed start to payments or seasonal repayments that match your income.
There are more conventional sources, too. The most common business loan is an overdraft which is a limit set by the bank on the amount of money a customer can draw from a cheque account after his or her own funds have been exhausted.
Sometimes an unexpected cost – or an opportunity – breaks ground and you must scramble to find the money.
Like a credit card, an overdraft is tempting because it is a revolving loan (money paid back can be borrowed again) that can be conveniently accessed without setting up another financial arrangement. Interest is charged on the amount owed to the bank.
Overdrafts have their own shortcomings. The bank can call them in at any time with no warning, and extra conditions can stipulate that a percentage of the money must remain in the account.
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