The last few years have been rocky times for the 32.5 million U.S. small businesses, according to the U.S. Small Business Administration (SBA). They have faced big challenges such as the COVID-19 pandemic, labor shortages and rising inflation. These firms, which account for 43.5% of gross domestic product, are also facing a lending crunch. The Associated Press reported in April that banks have been less generous with loans. In 2019, about 50% of businesses received the full amount of loans they requested. But in 2021, it was 30% — a steep drop.

Minority- and women-owned businesses also feel they have a big hill to climb when it comes to loans. For example, Black-owned businesses feel they are less likely to secure the full amount of financing they request. For women, a Bank of America study stated that 60% of female business owners felt they didn’t have the same access to financing as male entrepreneurs.

In the face of this challenging environment, more business owners are taking a hard look at how to improve cash flow, from traditional sources to emerging alternatives.

Traditional sources of capital

To fund their business ventures, business owners have typically turned to their personal savings or family and friends. Outside of that, bank loans remain a go-to option because of their relatively low rates. But those loans are becoming harder to secure. Another issue is that many banks require multiple years of financial records, which emerging companies may not be able to provide.

Loan financing also comes with strings attached, such as administrative red tape, restrictions, lag time in receiving the actual funds, and shorter coverage periods.

Another “traditional” route is asset-based lending, which requires collateral. This type of capital has its own detractors, including substantially higher overhead to maintain and higher interest rates over time. Also, lenders prefer liquid assets such as securities, which many business owners may not have.

A third option is factoring programs, which involve businesses selling their unpaid invoices in return for immediate working capital. Downsides include lack of control and higher costs compared to regular loans. Another detractor is stigma — factoring may signal to customers possible cash flow problems.

Alternative sources of financing

Many business owners have now turned to alternatives such as online lenders and crowdfunding.

Businesses with a new product have turned to crowdfunding sites like Kickstarter and Indiegogo. But there can be pitfalls. Setting up a campaign that goes viral and attracts supporters isn’t guaranteed.

Online lending platforms are another attractive form of financing, but while the cash flow may be instantaneous compared to traditional banks, these online loans come with higher interest rates and big late penalty fees. A cursory look at online lenders reveals APRs at 10% or higher. Traditional bank loans are 3% to 7%.

New solutions for financing and managing cash flow

For business owners who find the drawbacks of traditional financing overwhelming or are leery of alternative modes, there is another route to consider when managing cash flow. Increasingly, nonbank companies are integrating bank-like services into their tech platforms, a concept known as embedded finance. These bank-like services could include payments and invoice processing and lending. Advantages of embedded financing, like Plaid or Apple Pay, are transparency, ease of transactions, the capture of relevant customer data, and they offer another revenue stream to businesses.

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