Businesses thrive when they have sufficient working capital. It ensures that there are available funds to keep the business rolling, capitalize on new opportunities, or weather a downturn. There are a multitude of reasons for a business to experience inadequate working capital particularly in new enterprises. More established businesses can find themselves short of cash due to slow paying customers, a downturn in the economy, increased orders, or a new investment opportunity.
Whatever the reason for having low working capital, there are short-term financing options for all business types. There are two primary options for securing short-term cash flow – equity financing or debt financing.
Equity financing involves selling a portion of your business to investors in return for operating funds. These investors are commonly referred to as venture capitalists or angel investors. As you use the funds for growing your business, both you and your financiers attain increased return on investment.
Equity investors are typically looking for companies with a technological advantage and the potential of explosive growth. Some will let you run the business and make key decisions while others will want to play a part in decision making to protect their investment. If this describes your situation and you don’t mind selling equity in your company, then it may be a solution to your working capital problems.
For many, the idea of selling off equity in their business is not an avenue they want to take. If that’s the case, then debt financing is your best course of action. It allows you to retain ownership and decision-making. Thankfully, there are several options a business owner can take.
Working Capital Loans
Working capital loans are ideal for businesses that have highly seasonal or cyclical sales. The funds are typically used to pay suppliers, pay employees, and generally provide cash flow until business picks up. There are two types of working capital loans – unsecured and secured.
If you or your company has a high credit rating, then you may be eligible for an unsecured loan meaning no collateral is necessary. If you’re a new or growing business yet to achieve a high credit rating, then the lender will likely ask for security in case of default. Alternatively, a Mid-Prime loan may be an attractive alternative to those business owners still trying to establish their credit rating without paying exorbitant fees.
Check out this page if you have bad credit and need a working capital loan.
This option allows companies to borrow working capital from a factor based on the value of invoices to customers. The businesses accounts receivable generated from invoices are used as collateral for the loan. Many small and start-ups may experience slow-paying customers while their suppliers need to be paid on time to establish credit. The downside is that factoring companies lend a discounted amount, typically from 75%-90% of the face value of the invoices.
Short-term inventory loans help businesses prepare for the “busy season” or take advantage of discounts on bulk purchases. Cyclical and seasonal businesses may find themselves short of cash after the slow period. But to fully take advantage of busier times they need to ensure they have sufficient inventory on hand. The business owner then pays off the loan as they sell the goods. There’s typically an interest rate charged on the loan in addition to other terms.
Business Line of Credit
A business line of credit is typically negotiated with banks, credit unions or other financial lenders. If your credit rating is good, you can set up the line of credit to be used when needed and is typically useful to those with seasonal or cyclical business cycles. It acts much like a credit card where the business owner pays off the loan while utilizing the remaining balance for operational expenses. Start-ups and businesses with questionable credit will not likely qualify for this type of debt financing.
Merchant Cash Advance Loans
Merchant Cash Advance Loans are ideal for start-ups and those who haven’t established a solid credit rating. A cash advance lender calculates your company’s future cash flow and profitability based on past credit card sales and financial/bank statements. In most cases, no collateral is required.
The working capital loan is secured by future cash flows and an agreed percentage is automatically deducted from credit card receipts with the balance flowing to your business. For those who don’t receive a large amount of credit card payments, an agreed amount will be withdrawn from your bank account or through an Automated Clearing House (ACH). Cash advance loans can be deposited into your bank account within a few days.
Choose What’s Right for Your Circumstances
As you can see, there are several options for increasing your working capital to meet your company’s goals. There are enough stressors in operating a business without worrying about how you’re going to pay your suppliers or meet payroll. If you’re against selling a part of your company to equity investors, then debt financing is the ideal solution. The debt financing solutions described above will not only allow you to meet your obligations but improve or establish your company’s credit rating increasing your options in the future.
Some working capital loan options take longer than others to be approved, so take that into consideration. If time is of the essence, then a Merchant Cash Advance Loan may be your best option.