A new business requires funds to conduct various operations, starting from setting up an office to paying salary to your very first recruit. The expense can go very high at the time you may not ever earn a dime from your business. That is why entrepreneurs with new startups look for funding or in more professional terms: working capital.
Working capital is simply the cash required by entrepreneurs to run a business to pay for expenses, suppliers, and staff. This is the amount that is needed to run the business until a business creates a profitable model, and the cash inflow turns positive. So, the question arises, what exactly is the working capital, and what are the options?
Technical definition is: Working capital = Current assets – Current liabilities
Here, the current assets include inventory, cash, and debtors, whereas the current liabilities mean loans and overdrafts. Finding working capital means subtracting what your business owns (current liabilities) of your business from what your business owns (current assets).
It is also important to understand that current assets can be quickly converted to cash, inventory, and primarily accounts receivable. The current liabilities can be termed as obligations that are due within a year, short term loans, and primary accounts payable.
What are the working capital financing options
Finding the working capital for startups and small businesses is not an easy task. The reason is that they are often not aware of the right options. Even though it is challenging to secure working capital for start-ups, it does not really mean you have to lose hope. Some options are specialized and significantly more easy to get. Here are some of the options to secure working capital for your startups:
Line of Credit for Start-up
Line of credit is like a credit card cum loan, which requires approval from the lender under specific terms. You can use a certain amount as working capital for a particular requirement, and in return, pay the interest on that amount. You can also re-access the line of credit once you have repaid the previous loan. The line is credit is a significant source of funding your start businesses. Lenders look into your business history to evaluate candidate’s eligibility. This means you need to have an excellent personal credit score and also some month’s operations to show to the lender.
Invoice factoring is a type of financial transaction and debtor finance where any business sells the accounts receivable to another company at a discount. A start-up will factor its receivables assets to suffice its current cash requirements. This solution is quite helpful for start-ups to cater to the problem of slow invoice payments. Since startups cannot afford to get paid late, with the help of invoice factoring, they can cover their expenses.
Micro loans for SBA
These micro loans are backed by the US government and are part of SBA (Small Business Administration) loan program. The institutions partnering with US SBA program can offer working capital up to $50,000 for businesses with good rate of interest and return period of 6 years. The startup needs to be based in the United States, and should have average credit, and must have a good business plan for a profitable business. The process is a little slow because of intensive paper-work.
Conventional bank financing
Start-ups can also solve the working capital concerns using traditional financing from a bank. Qualifying for bank financing is not easy, especially for new businesses. To become eligible, your company would require a good growth record, a great team, substantial assets, and excellent financial statements. If your business match the criteria, bank financing will be cost effective.
Purchase order funding helps resellers as well as distributors funds to pay to their supplier’s expenses. For start-ups, getting a big order is both an opportunity as well as the problem. The fulfilment cost for big orders can use the resources, or maybe they do not have enough to fulfil the order. The excellent solution to handle the working capital concern is to use the purchase order funding. It provides direct funding to cover supplier expenses for a particular purchase order.
Raising working capital from equity is not meant for every entrepreneur. But, if you have a tight budget and you have bot strapped the operations, it might be the right to seek prospective investors. It is terrifying to give away the part of your business, but if it is a do or die situation, this must be the right time to seek equity financing.
Small Business Grants
When you know you are looking in the right direction, you will find that there are few places with free money for startups. That’s right! There are various organizations across the US offering small business loans for entrepreneurs in every industry. You will need to find the right organizations and do the paperwork and apply for different grants. If you can secure the working capital for your business, you are in for some free treats.
Selecting The Best Funding Options
Choosing the best working capital option depends on your requirement of funds. The factors include the company’s track record, experience, and whether it is new or old.
If startups face problems because of slow-paying clients, they can consider invoice factoring or micro loan. Big startups can opt for asset-based funding facility, and the startups with large order should consider purchase order funding. Lastly, for startups with excellent financial statements, balance sheets, and profitable track records, the line of credit is an excellent choice.
If you are a startup owner who requires working capital, avoid the heavy cost related to the financing options. These heavy cost financing options consist of merchant cash advances, factoring, and lending online. You can do this by exploring alternative that can give you low cost financing options that are easily available through local institutions. Such alternatives will help your business receive a necessary boost at the right time.