It is one thing starting a business and another keeping it afloat. And when your new enterprise is rolling along and growing in sales, a cash crisis is the last thing you expect; though it can happen any time, making everything go on the blink.
Without sufficient working capital, you can’t expand your business, and you may not be able to fulfill new and current orders. Notably, a 2017 Mid-year Economic Report by the National Small Business Associations notes that 16% of small enterprises that can’t secure enough capital fail to finance their increased sales, 20% reduce their numbers of employees while 35% lose out on opportunities to expand operations.
The average small enterprise has only 27 ‘buffer days’ of reserve cash. Which is why so many risk a cash flow crunch.
Finding Working Capital for Your New Business
One thing’s for sure – as a startup, you have limited access to small business loans.
Most banks have specific requirements for working capital i.e. a minimum number of years in operating history and amount in revenues.. Also, since it costs banks the same amount to process a $50,000 loan as a $1 million loan, albeit with much less profit, they have less incentive to lend small enterprises the small amount they need as working capital.
The good news is, you’re not totally out of luck. There are several other sources for working capital financing. These include;
- Business Line of Credit
A business line of credit is like the crossbreed of a loan and a credit card. In this case, you work with a lender for approval of a certain amount with terms. But instead of receiving it as a lump sum, you can only withdraw small amounts at a time. Many small business owners use a business line of credit to finance their operations whenever there’s a cash flow crisis.
The best part about the business line of credit is that you only start paying back the money borrowed when you draw on your line of credit. For instance, if you receive a $25,000 line of credit in January and draw $15,000 in June to finance the payroll, you can start making payments in July.
While most lenders require evidence of business history before approving business line of credit, some are quite flexible and only need you to provide an excellent credit score. No collateral needed!
- Vendor credit/ Trade credit
Have you ever bought supplies or inventory net 90, 60, or 30 days? This is an example of trade credit. By all means, a grace period to settle what you owe your supplier can go a long way in helping you deal with cash flow problems. But you have to first establish a good relationship with your vendor, for them to trust you enough to allow you to leave a balance each month instead of paying the bills in full.
Alternatively, you and your vendors can use a software platform to create terms of credit. Yes, there are platforms in which once you purchase inventory, it immediately pays your suppliers in-full while you remain with a whole 60 days to settle your accounts. For instance, Fundbox pay.
- Business Credit Cards
The answer to your cash-flow crisis could, sometimes, be in your wallet. Needless to say, credit cards rank top three of all the sources of start-up working capital financing. With a personal business credit card, you can take a cash advance or finance a purchase without having to wait or apply for approval.
However, using this method of financing can quickly become costly, considering that most banks charge an average of 14.16% in interest rates for business credit cards.
- Equity Financing
Admittedly, giving away part of your company in exchange for capital may sound terrifying. But if you can’t bootstrap your operations any further and you’re out of financing options, this might be a good time to seek investors. To get equity financing, there are four basic conditions you must meet:
- Your business concept should be unique.
- Your business should have the potential to grow fast.
- You should have an ‘in’ with investors or an experienced team behind you.
- You should be okay with losing part of your ownership.
Investors seek around 20% of business ownership with each round of financing. Meaning that after fundraising three times, you may no longer be the majority shareholder of your company. No wonder equity financing is the last resort for most business owners.
- Invoice Factoring
Also known as ‘debt factoring’, invoice factoring or simply ‘factoring’ is a financial service that allows enterprises to sell unpaid invoices (account receivable) to a third party- the factor or factoring company. In essence, the factor buys your invoices and then takes responsibility for collecting them in return for 70-80% of their total value.
As such, invoice factoring is quite an expensive method to get working capital, though it’s increasingly becoming popular with businesses with imperfect credit.
- Loans from Friends and Family
When getting working capital becomes the only thing determining whether your business sinks or swims, don’t be shy to call up that rich uncle. Help from family or friends can come in handy when you can’t access traditional financing options. But be careful.
In as much as it’s easy to borrow quick funds from your favourite auntie, be sure to make it a deal and put everything in writing. This formal approach shields you from tax issues and takes the pressure off your relationships. You don’t want your aunt or best friend resenting you because you can’t seem to remember that $2000 loan.
- Small Business Grants
Turns out, there are many organizations across the country offering small grants for new entrepreneurs across industries, ethnicities, genders – you name it. You just need to figure out where to look. This might involve doing loads of research, some heavy paperwork, and applying for numerous grants before you hear anything. But it’s time well spent if you end up securing free business working capital.
To better position yourself to receive working capital from lenders, strive to build a solid business and credit history. Which basically means waiting it out. Yes, you must have the patience to do enough business to be able to present predictable cash flow, strong financial statement, and excellent credit month after month (in business).
Choosing the Right Financing Option (s)
Without a doubt, every financing method mentioned above has its pros and cons. It’s your duty as a savvy business owner to weigh all the options and choose the best one. Often, the right choice depends on your type of business, your financial situation, and your timeline. Though you can still work with several financing options, using each one of them for different needs.