Avoid these working capital missteps
Make sure you review these issues before taking out a working capital loan. It’s always a good idea to revisit your business plan to help you determine the best approach to your finances.
- Improper use
Don’t confuse short-term working capital needs and longer-term, permanent requirements - Poor financing decisions
While it can be tempting to use a working capital line of credit to purchase machinery or real estate or for hiring, these expenditures call for different kinds of financing. If you tie up your working capital on expenses like these, it won’t be available for its intended purpose
Where can you find working capital?
Working capital loans are available from online lenders, banks, and credit unions. Additionally, some companies who service small businesses, like PayPal® and Amazon®, are entering the lending space.
Banks and credit unions are options for established businesses with collateral and strong credit, while online lenders may provide options for borrowers with varied credit histories.
Business cards have a set credit limit and allow you to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. Here’s some more information about this popular funding option: 5 Business Credit Card Myths.
- Invoice financing/factoring
Invoice factoring is not a loan in the traditional sense. Instead, you sell your customer invoices to a factoring company. They take care of collecting the payments, in exchange for a fee, which means you can receive funds more quickly.
Invoice financing is slightly different. You maintain control of your invoices, because instead of selling them to a factoring company, you use them as collateral when applying for a short-term cash advance.
A business line of credit is a revolving line you can draw against as you need it, meaning that you only pay for the money that you use. Lines of credit can be extended by a large traditional bank, a small local bank, or an alternative online lender. Lines of credit can be secured, unsecured, short-term, or long-term.
Merchant cash advance companies provide funds to your business in exchange for a percentage of the daily credit card income. A processor clears and settles the credit card payment, drawn from customers’ debit and credit-card purchases on a daily basis, until the obligation has been met. Most providers form partnerships with payment processors and then take a fixed or variable percentage of future credit card sales.
Many banks offer term loans with a wide use of proceeds, including working capital. A Bank Term loan from lenders in the SmartBiz network is a short-term, fixed-rate loan with stable monthly payments. These loans are a great fit when you need funds quickly and want to lock in your interest rate. Another benefit? Paying off this type of loan responsibly helps to build business credit.
- Small Business Administration (SBA) 7(a) loan
SBA 7(a) loans have great rates, long repayment terms, and low monthly payments. These are government-guaranteed small business loans. The SBA provides a guarantee on the loan, promising to reimburse the bank for a certain percentage of your loan if you default on that loan. This guarantee lowers the risks to banks and other lenders, encouraging them to offer these loans to more American small businesses. Many banks and other financial institutions offer SBA loans, but their process, requirements, and fees can vary.
SmartBiz has streamlined the application process for an SBA loan from a bank in the SmartBiz network. In addition to an easy-to-navigate online platform, we’re very clear about the documents needed. If you have your paperwork in order, the process can move swiftly from prequalification to funding. We match borrowers with the bank that is most likely to approve and fund an SBA loan for your business. You won’t waste time going from bank to bank, we help do that for you.
Visit SmartBiz today and discover if you’re qualified for an SBA loan.*
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
Final thoughts
It’s a good idea to work with your accountant or another financial professional to determine when you need to get a loan, how much to borrow, and the best use of the funds. It’s impossible to predict every challenge your business will face. However, a clear understanding of working capital can help you operate smoothly and set you up for success.