Having access to working capital is an ongoing challenge facing small business owners in today’s economy. The availability of cash influences a company’s ability to meet its day to day financial obligations. It also determines whether the business can fill an order that may exceed production capacity, maintain adequate inventory levels, or expand in new markets.
By definition, working capital is the amount by which current assets exceed current liabilities. The majority of businesses need short-term working capital during some point of their business operation. For example, a seasonal business needs working capital to fund seasonal inventory buildup during the holiday season.
There is no debate that every business will at one point require an influx of cash to cover unforeseen expenses and growth opportunities. So what can small business owners do today to ensure they have access to capital tomorrow?
The most important step to take is to plan ahead. By setting up several sources of funding a business owner can avoid getting caught off guard by having cash on tap when it’s needed most.
The financial solutions listed below are designed to help businesses meet their cash flow needs:
Untraditional line of credit – a business owner can leverage good credit scores by applying for unsecured lines of credit in the form of business credit cards. The best credit cards for business owners should have low APRs, sizable credit limits, and report solely to the business credit agencies. With a revolving line of credit a business will have money available up to a certain limit and will only have to pay interest on the funds the company actually withdraws.
Merchant line of credit – a business with sizable monthly credit card sales can easily qualify for a business cash advance or advance line of credit from a merchant cash advance company. This program enables a business to receive funds in exchange for a percentage of the company’s future credit card income. Qualifying is a quick process and doesn’t require all the documentation most traditional financing programs entail.
Accounts receivable financing – if you have capital tied up in accounts receivable then you may want to consider accounts receivable financing. This program may be just what you need to free up your capital. The way it works is after invoicing customers for products or services completed you provide the A/R financing company with a copy of the invoices and supporting documentation. The A/R financing company may then advance up to 90% of the invoice amounts to the business usually within 24 hrs. After the customer A/R financing company receives the customer payment, it releases the remaining 10% to your business minus their administration fee.
Debt financing – applying for a traditional business loan can be a lengthy process but can provide the funds a company needs. If a business owner suffers from personal credit challenges he can also obtain a revenue based loan as an alternative. Revenue based funding is based on the company’s bank deposit history as opposed to personal credit scores.
Another way to obtain working capital is through special government subsidies. Certain industries and activities such as exporting can benefit from these programs offered by the government. For example, the SBA operates the Export Working Capital Program to meet the needs of businesses who export.
Finding working capital doesn’t have to be a challenge if the proper planning and sources are put in place. Whether you select unsecured lines of credit, accounts receivable financing, debt financing, or a merchant cash advance; establish access to multiple sources of working capital so your company can get the cash it needs when needed most.