Business owners know that a sudden need for working capital sources happens with more frequency than they anticipated, and often at the most inopportune time. Banks take too long to process loans and even then there is no guarantee of approval. This leaves a business owner no other option than to seek alternative loans in order to ensure that they can continue with their day to day operations.
Even when running a profitable company with plenty of assets, cash flow is often a problem. Unpaid invoices and inventory may all be a part of your capital, but unless you are able to turn them into cash quickly, they will not be of any use when it comes to meeting payroll, paying utility bills, and even buying materials or stock needed to keep your business growing.
Fast working capital sources provide an alternative method to getting money flowing into a business quickly. There are a number of ways to go about this, each with their own set of upsides and downfalls to consider:
Fast Working Capital Sources
Factoring – If your business is waiting on invoices to be paid, you could sell them at a discount in order to raise money. Sometimes referred to as accounts receivable financing, the third party buyer of the invoices, or factor, will typically advance the money within 24 hours of reviewing the invoices. Depending on the factor you work with, you could get anywhere between 80 to 95 percent of the value of the invoices. This is not a loan, as the factor collects from your customer directly, reimbursing your business any balance minus their fees.
The downside to factoring is that you do lose a portion of your profits, and could even end up losing money on the unpaid invoices if the fees are too high. Before agreeing to this type of cash flow solution, make sure that you are not inadvertently hurting your bottom line. Also, it is rather intrusive in that your customer knows you are securing capital in this manner. This is rather common though in the construction industry.
You may also have a hard time obtaining this type of solution if you have a blanket lien on your business from a bank. One of the conditions with factoring is that the factor has a first lien on the invoices collected, which could interfere with the terms of a previous bank loan.
Purchase Order Financing – With factoring, the product or service has already been provided and the factor is making themselves the new payee. With purchase order financing, the money is given based on the promise of an order. This is a fast working capital source most often used by wholesalers or distributors who have received a large order, but do not have sufficient working capital to meet the demand.
The purchase order financier will offer the money needed upfront, waiting to be repaid once the goods have been delivered. This type of working capital source tends to be limited, as financiers don’t typically take the risk with a manufacturer who must add the value to a raw product. Also, there is more of a risk, making the cost of a purchase order finance higher for the business owner.
A Common Working Capital Source
Merchant Cash Advance – This type of fast working capital lending is rather common and involves you selling a percentage of your future credit card sales to the merchant. The merchant is able to get you the capital you need quickly, and then receives their payment from you through direct sales from credit cards. There is typically no set terms for when the money is paid back, although most are designed to be resolved in less than a year.
The major drawback to a merchant cash advance is that you may be charged an exorbitant rate for the service. It has increased in popularity though, with some companies now offering the advance at affordable prices. Do your homework carefully before committing to this type of fast working capital source and compare rates among a number of different providers.
Peer-to-Peer Lending – This type of fast working capital source is web based, with the site working on pairing you with someone from a list of personal lenders. Peer-to-peer lending is structured like a loan, where you are obligated to make repayments on the principal plus the interest. Interest rates will vary depending on the site and the lender, with the terms averaging three years.
Since peer-to-peer lending is a loan, there are late payment charges. Plus since there is a third party involved- the web site – you will pay additional fees to them for the service. This is an alternative lending solution that has seen rapid growth since the concept began in 2006 with a number of reputable sites to choose from.
Crowd Funding – Like peer-to-peer lending, crowd funding is internet based, yet in most cases is reliant on donations rather than loans. Many start-ups have used this system to obtain funds to get their concept off of the ground.
The trouble with crowd funding is that it is not as fast as you may need it to be. Plus, you really need to have an extensive online network that will help sell your pitch for donations. The only fees are paid to the web site running the campaign, who will take a percentage of each donation, but some companies have offered discounts on future products or other incentives to those who make a donation.
Asset Based Lending – By using your businesses machinery, inventory or other assets as collateral, you could obtain a secured loan through an alternative lender. There are a number of benefits with asset based lending. For starters, the amount you can borrow is usually higher than with other alternative lenders, and it can be structured as a revolving line of credit. This means that like a credit card, the funds are there when you need it, but you only pay interest on what you have borrowed.
Of course this working capital source necessitates having valuable assets to offer as security. This makes it more accessible for large companies with extensive inventory or expensive machinery. Plus there is the risk of losing those assets if you do default on the loan terms.
The best way to ensure that the fast working capital source that you choose is beneficial is by first investigating the various options available, and then carefully comparing the different working capital sources that are providing them. There are vast variations among fast working capital sources, that will have a great affect on how beneficial it is for your business.