Working Capital Options for Your Small Business
Working capital is the money required by your company to complete its daily operations. This includes rent, utilities, wages, and inventory. Without a working capital, your company would fold; that is why it is critical to know what sources of money are available. Here are a few options:
This source of working capital is easily available to you and is effortless to obtain compared to more traditional means of financing. It includes trade credit wherein suppliers allow you to obtain goods immediately and pay for them later. In other words, you order a product, the product is delivered, and the supplier bills you within 30 days. Trade credit is often referred to as “payables”.
Loans that must be repaid within a year from the date of agreement are referred to as short-term loans. Cooperatives, banks, credit unions, and the US Government’s Small Business Administration can offer these loans to you. Specially designed bank overdrafts are also considered a short-term loan, and have a pre-determined limit of allowed overdraft. This type of loan is often used as needed, repaid, and used again with no additional agreements needed.
A standard loan between two parties with an agreed upon repayment date, and with pre-determined payment amounts is a long-term loan. You borrow the money for an agreed upon period that exceeds 12 months and with a set interest rate. This type of loan is usually secured with property or other physical assets, and offered by larger banks and the US Government. This is a one-time infusion of money for working capital.
Line of Credit Loans
Much like the short-term loan, a line of credits is an agreement between the borrower (you) and bank that allows the you to obtain a set amount of funds as needed. The funds are continually available, but do not have to be taken. Also like a short-term loan, this working capital source is used on an as-needed basis.
Asset Based Loans
Your vehicles, machinery, and accounts receivables may be used to obtain working capital loans called asset based loans. This type of loan is usually secured from major institutions and requires balance sheet assets. It is also known as commercial finance or asset lending.
Inventory Based Loans
Secured with your business’ inventory as security, these loans bind your ability to sell the secured inventory until the loan is repaid. This is a short-term loan is used to purchase products for resale or work through seasonal market fluctuations in cash flow.