To many people, choosing to get into entrepreneurship is equal to risking the certainty offered by a regular job to pursue a long-term financial goal. However, in times when the economy is highly volatile people in formal employment consider entrepreneurship as the necessary vehicle for a stable financial future. This belief is seen in entrepreneurs of different ethnicities and they strongly believe that this is the key solution to ages of financial differences. To sum it up, Association for Enterprise Opportunity has reported that entrepreneurship has contributed to a reduction in the wealth gap between Whites and Blacks from 13 times to 3 times.
Although business ownership is a sure way of guaranteeing continued asset accumulation, it has its challenges. Young businesses are devastated by reduced cash flows or an increase in total expenses. A report made by the JPMorgan Chase Institute has indicated that small businesses are struggling with inconsistent cash reserves to deal with business expenses. The average small business can only manage to cover expenses for up to 27 days when they are faced with an emergency. Otherwise, if the business is operating in a low wage industry, the time reduces to just 19 days.
The effects of unstable cash flows in a business are far reaching and affect the employees as well. It is reported that a high percentage of small businesses are experiencing difficulties with payrolls and unstable employments. This is more prevalent to relatively young start-ups with employees and the most affected businesses suffer from inadequate funds to cover extended dry spells.
Unstable business foundations
A recent research conducted by Accion and Opportunity Fund reported that many entrepreneurs consider financial stability an important business factor. At times, it is more important than business growth. However, it is common to see beneficiaries of Accion and Opportunity Fund loans claim they are worried about finances one year after getting their funds. In addition, most entrepreneurs confess that they are not well equipped to deal with emergency expenses. One entrepreneur revealed that they are constantly worried that an emergency can permanently damage a young startup.
At the same time, inconsistent cash flows in a business have a direct effect on household finances. At least 76% of all business owners try to solve the cash flow difficulties with their personal funds. An entrepreneur can utilize various sources like personal savings, giving up a personal salary, or taking the maximum credit limits.
This can easily have a negative impact on your credit score and it could lock you out of good options for funding in the future. In addition, it is normal for business owners to plow back the profits into the business as opposed to investing in their households. In the study, more than half of the entrepreneurs reported a significant profit for the last six months but the number that invested in household savings is under 30% of all respondents.
The solution has turned out to be the greatest challenge
The dwindling sources of funding for startups from traditional lenders have left many businesses desperate. Although working capital is critical to dealing with emergency expenses, very few have the opportunity to get sufficient funds. The gap created has led to the birth of alternative sources of funding that business owners turn to. Despite giving hopes to entrepreneurs, the lenders tap into the desperation of business owners to get fast cash and use that opportunity to charge ridiculous interests. Considering that the emergent industry is not well regulated, there are many challenges faced when dealing with these lenders. For instance, borrowers are concerned about the disparity of the services offered as well as little transparency on the fees and interests.
At the same time, most entrepreneurs end up in cyclic debt after committing to an expensive loan. Surprisingly, one out of every four small businesses seeking a loan is intending to use the proceeds to refinance an active loan. When most applicants with existing debts were studied, it was discovered that they had taken realisiticloans.com-without credit check lenders with an average APR of 94% and to make the matters worse, they were required to make monthly payments that are double their current income.
Role played by mission-based lenders
The hardships that business owners experience after taking expensive loans have proved that capital doesn’t always lead to economic prosperity. To further the idea, even when you have access to fair credit sources, capital will always be a single component to a long journey to financial freedom.
Mission-based lenders have a big role to play in ensuring that small businesses can get favorable loans. The best time to do this would be before the business owner becomes desperate and runs to high-cost options. Also, financial advising is a great way of ensuring that most businesses can effectively plan and prepare for emergencies. In the meantime, efforts are being made to understand the common barriers to implementing a financial plan.
Business education has seen a positive uptake by many business owners today. Because the financial landscape is constantly changing, it is important that new businesses keep learning and improving their operations. Most importantly, entrepreneurs must understand all lending options available before they decide on any.
It is evident that having a business is a sure way of ensuring a positive and healthy economic growth. But for this to happen, mission-based lenders ought to work towards ensuring all financial support available is geared towards ensuring business success.