Working capital is the life blood of every small business. Without working capital, you won’t have the money to pay overhead expenses, purchase raw materials, meet your payroll, or pay your vendors.
In fact, a lack of working capital combined with poor cash flow is behind most small business failures. To avoid ending up as one of those statistics, it’s important to identify the best working capital solutions for small businesses.
Ultimately, the best working capital option is going to depend on you, your business and your current financial situation. For example, startups may not qualify for the same things as established companies.
Before choosing what financing solution is right for you, you need to understand the basics of each. Here’s a quick list of some of the most common working capital options.
Line of Credit
A bank line of credit is, for many small business owners, the gold standard of working capital solutions. When you have a line of credit, you pay only for the money you use. That makes it a good solution if you have working capital needs that fluctuate or are difficult to predict.
The biggest stumbling block to a line of credit is that many small businesses can’t qualify for one because banks have very strict requirements for LOCs. If your business is new or your personal credit isn’t stellar, then a line of credit may not be a viable option to provide you with the working capital you need.
Merchant Cash Advances
Merchant cash advances have become popular because they are easier to qualify for then a line of credit or small business loan. They usually work by providing a cash advance that a business repays with a daily, weekly or monthly percentage until balance is paid. Some MCA companies require automatic ACH payments from their clients’ bank accounts.
Typically, MCAs have high fees that can add up and cause significant issues if your projected sales miss the mark. For example, if you took out a $30,000 MCA with a factor of 1.4, your repayment amount would be $42,000 and might increase if it took longer than expected to pay back. For that reason, many small business experts consider MCAs to be a working capital solution of last resort.
Small Business Loan
Small business loans have some things in common with both lines of credit and MCAs. Loans are for a fixed amount and you’ll pay interest on the entire loan amount whether you use it immediately or not.
Qualifying for a small business loan presents some of the same challenges as qualifying for a line of credit. However, federal agencies including the Small Business Administration offer loans that may be easier to qualify for than bank loans.
Invoice factoring is a working capital solution that combines the advantages of a line of credit with same-day funding speed. When you factor your invoices, you receive an advance on the majority of the invoice within 24 hours. The factoring company collects its fee when the invoice is paid, while also providing back office solutions such as invoice collections, credit checks and more.
The big benefit of invoice factoring is that you can often choose which invoices to factor. You’ll only pay fees for the invoices you factor, which makes invoice factoring like a line of credit. It’s easy to qualify for invoice factoring since many factoring companies, including Triumph Business Capital, are willing to work with young businesses and business owners with less-than-perfect credit.
For many small and medium-sized businesses, invoice factoring is the quickest way to unlock the working capital they need. It offers flexibility and scale without leaving you debt to pay back.
What working capital solutions make sense for you?
Getting the working capital that you need to run your business is a priority. The solutions here can help you streamline your cash flow and grow your business.
Interested in learning how invoice factoring can work for your business? Click here to contact us!