There are a number of alternatives to lending such as investing through your own personal resources and obtaining investments from third parties. Financing through your own resources can be quite hard because most people don’t have enough cash or assets to expand their businesses.
Investment can be obtained through a third party but that also poses a different set of problems. Such investments may prove prohibitively expensive in the long run because the third party will invest on a profit sharing basis. They will sign a contract with you wherein you agree to hand over a fixed percentage of the profits to the other party – for life. Just think of the millions you will have to give away in the name of profit sharing. This is not the case for debt financing.
You just have to pay the fixed interest rate till you pay off the debt. Once you pay the outstanding interest and the principal amount, you cannot be compelled to pay anything more. The subsequent profits are for you to keep and enjoy. So in the long term, debt financing may be very cheap even with a high interest rate.
And in the shape of S corporations, you are also offered several privileges that can protect you against certain risks. The S corporations and its shareholders are separate entities. It is only the corporation that can be sued for loans. The shareholders are safe from unlimited liability.
The trouble is that SMEs have a very low chance of getting a bank loan in the first place. Even if the loan is approved they may not get the full amount, they may be forced to give their assets as collateral and they often have to wait for several weeks before the loan is granted. They have to endure the long drawn out process of documentation and inquiry. This defeats the very purpose of the loan.
A healthy SME will typically ask for a loan if there is a sudden surge in demand or if it needs new capital equipment to fund expansion. Every single day lost in waiting for a bank loan counts as lost business and therefore represents losses. So the longer you are forced to wait for the bank loan the bigger your losses will be owing to lost business opportunities. This can be disastrous.
E-commerce sites, for instance, might experience a sudden surge in traffic which can translate into much higher revenue, but they will also need to quickly scale up according to the increased demand and they may need a loan for that. However, if the loan is late in arriving (as it often is with bank loans) or it doesn’t arrive at all, the increased traffic will soon vanish and you will have incurred tremendous losses in the shape of lost revenue.
It is good to know that better and faster alternatives exist besides the arduously slow banking system. These alternatives offer unsecured lines of credit, approve loan amounts within 24 hours, instantly provide you with generous working capital when you need it the most and so much more.